NEW YORK – If it weren’t for some pesky accounting rules, telecom-equipment company Ciena Corp. would have lost a mere 2 cents a share in the fourth quarter. With those accounting rules, it lost 44 cents a share.
The disparity is “the GAAP Gap” – the difference between “pro forma” earnings and earnings prepared according to Generally Accepted Accounting Principles, or GAAP.
GAAP is the nation’s accounting standard. Pro forma earnings, by contrast, are governed by no fixed standard. Companies can toss out one-time charges, options expenses, goodwill write-downs – anything that looks bad. One-time windfalls, however, usually manage to stay in.
Merrill Lynch’s U.S. Strategist Richard Bernstein did the math on 1,600 stocks and found total earnings for their third calendar quarter grew 22 percent on a GAAP basis, but 31 percent on a pro forma basis.
“Lower quality companies are dramatically overstating their growth rates by using pro forma earnings,” Bernstein wrote in a Dec. 19 research report.
Part of the problem, according to Bernstein, is that most post-bubble regulations focus on the quality of formal financial reporting, but “there appears to be no regulation” covering earnings conference calls and press releases.