They say history repeats itself, but the signs coming out of Wall St. are reminding analysts of a history many don’t want to repeat. Adjusted financial reporting is making a comeback as hundreds of companies in the United States have resorted to financial shell games in their corporate earnings reports. By using these numbers, companies are able to present improved statistics in the form of 'adjusted' net income, 'adjusted' sales, and 'adjusted Ebitda'. The changes have allowed some companies to create the illusion of double digit improvements.
One undisclosed company is using adjusted metrics internally to evaluate management and compare its performance to rivals. The rules are complex, but these kinds of reports often fly in the face of securities regulations, making this an interesting dance for companies to venture into.
According to reports, one out of every ten major securities filings made this year used the term adjusted Ebidta, which represent adjusted earnings before interest, taxes, depreciation, and amortization. The number of companies using this metric is rising, too. Only one out of forty companies used these methods a decade ago. In fact, about 25 percent of the filings this past year used figures that didn't comply with generally accepted accounting principles.
Whether this renaissance of unusual accounting methods is the product of evolving accounting community practices, corporate pressure, or an indicator of something darker, people are starting to notice. The adjusted financial terms have been seen in securities filings, quarterly earnings releases, as well as standard financial reports. Ultimately, Wall St. and investors are left to decide whether these practices are something they are willing to accept or whether it is something that reminds of a financial disaster of the technology era. These kinds of financial shell games are nothing new, but there is an explicit danger should they become largely accepted or ignored. In any case, they introduce confusion into an already complicated market and make analysis that much more difficult.