Are Adjusted Profits Misleading Investors?

Stock Market

A recent report by the Associated Press of 500 major companies has found the gap between adjusted profits and profits according to general accepted accounting principles has widened in the past five years. According to the report, one of every five company has “adjusted” profits in excess of net income by more than fifty percent.

The “adjusted” numbers are starting to add up to a potential problem. In total, adjusted profits by the S&P 500 from 2010 to 2014 have led to $583 billion above net income. And the adjusted profits at 15 companies were in reality losses according to GAAP accounting over the five years.

Stricter disclosures to investors concerning how companies arrived at adjusted numbers were supposed to help put a stop to the types of accounting fraud that became popular prior to and during the dot com crash. But there are now concerns that investors aren’t doing enough digging into the numbers provided by businesses. And financial analysts, who are supposed to be doing independent analysis of the companies on behalf of investors, are being accused once again of simply rubber stamping the company numbers.

Businesses use one-time restructuring charges to account for unusual items such as a loss during the divesture of a failing division or other asset. By removing them from the day to day accounting, they could provide a better look at the operations of the company going forward. However, when restructuring write-offs become the norm, the adjustments begin to look as if they are truly just ordinary operating expenses of the company.

The Dow Jones Industrial Average is now about 28 percent higher than it was during the stock market’s peak prior to the Great Recession. Is this increase warranted? Or is it being driven by high frequency trading, adjusted profits and other matters that are disconnected from the fundamentals of the company and the economy?

If you have evidence of accounting fraud at a publicly traded company, contact one of our SEC whistleblower attorneys to discuss your options under the incentive program created by the Dodd-Frank Act. An attorney can be reached by our contact form or by phone at 1-800-590-4116.