Large-Scale Study by USC Marshall School of Business Professor Finds Non-GAAP Earnings Meet/Beat Forecasts by 20%
Fort Mill Times
LOS ANGELES -- Mark Soliman, Arthur Andersen & Co. Alumni Associate Professor of Accounting at the USC Marshall School of Business and the USC Leventhal School of Accounting, and his colleagues, Jeffrey Doyle at the Jon M. Huntsman School of Business at Utah State University and Jared Jennings at the Olin Business School at Washington University in St. Louis, have broken new ground with their article, "Do managers define non-GAAP earnings to meet or beat analyst forecasts?," published in the Journal of Accounting and Economics. Studying 237,617 earnings announcements from 1998-2009, the authors have conducted the first large-scale study which shows a definitive relationship between issuing non-GAAP or pro-forma earnings (which deviate from what are considered generally accepted accounting procedures) and propensity to exceed analyst forecasts.
Approximately 25.5% of firms in the sample issued non-GAAP earnings. According to Soliman, this pro-forma earnings/non-GAAP reporting allows firms to classify expenses as "one time charges" such as restructuring charges, special one-time, non-recurring, non-cash or non-relevant expenses. These are highly discretionary expenses that firms arbitrarily remove from their financials in order to increase earnings. The authors find that managers tend to do this when other forms of earnings management have already been used and already "maxed out."