Another Sunday at the local café, another used New York Times picked up for free. Writing in Business Day, Gretchen Morgenson reports on the increasing tendency of public companies to use “fantasy math” in their financial reports:
According to a recent study in The Analyst’s Accounting Observer, 90 percent of companies in the Standard & Poor’s 500-stock index reported non-GAAP results last year, up from 72 percent in 2009.
Regulations still require corporations to report their financial results under accounting rules. But companies often steer investors instead to massaged calculations that produce a better outcome.
What are these “massaged calculations”? Morgenson explains: financial reports prepared according to GAAP—generally accepted accounting principles—must show all expenses, which of course reduce the bottom line. But financials prepared outside of GAAP can leave off any number of costs, making the company’s performance look better. In other words, non-GAAP financials can omit anything management finds it too inconvenient to include. “Thirty companies in the study generated losses under accounting rules in 2015,” Morgenson writes, “but magically produced profits when they did the math their own way.” For the 380 companies in the study, non-GAAP income was up 6.6% from 2014—but GAAP income for the same companies was down almost eleven percent.
What does this mean for small nonprofits that will never darken Wall Street’s doors? It’s just one more reminder that GAAP should be your religion. Following GAAP means that your financials will be consistent, reliable, and as accurate as possible. GAAP keeps your organization accountable and transparent. Mind the GAAP!