"Pro forma" was so 1990’s


"Non-GAAP" is the new "pro forma".

Remember the exciting dot-com boom days? Everybody was reporting "pro forma" results. Pro forma in the 1990's turned into a euphemism for "We just made this stuff up". But after the dot-com bust and a series of accounting scandals, the phrase pro forma turned into a bad word on Wall Street. People swore off that pro forma nonsense and returned to the good old GAAP numbers.

But we all knew that that wouldn't last for long.

But people aren't being so cheeky as to use the phrase pro forma. No, the magic phrase is now "non-GAAP". Punch that into your favorite search engine and watch all the people reporting earnings that do not conform to generally accepted accounting practices.

Let's see how long before this ruse finally collapses. And how much money people lose as a result.

Comments (12)
  1. Dan McCarty says:

    Well, Google search result #4 for "non-gaap" is Duke Energy, a company that’s been teetering on the edge of bankruptcy for a few months now. So I’d say your assessment is spot on.

  2. Steve says:

    When "non-GAAP" showed up, I was surprised at how many people didn’t know what GAAP meant, and were trading stocks. Sounds like Darwin in action, again.

  3. casper says:

    Come on …. GAAP is a term you learn in high school, if not at least in any 1st-year university-level accounting class. As Steve said, Darwin in action again. Sigh.

  4. bmm6o says:

    Uh, casper, do you think everybody takes a university-level accounting class? Even at a liberal arts school, intro accounting isn’t a popular class outside business majors.

  5. Enron - A Libertarian Success Story says:

    Since when did generally accepted acounting practise not incldue "screw them before they screw you" and "you get what you can take, not what you’re given" ? ;) Well, if we take what every other business does as "generally accepted", that would seem to be what GAAP actually means.

  6. Cooney says:

    Since when did generally accepted acounting practise not incldue "screw them before they screw you" and "you get what you can take, not what you’re given" ?

    No, that’s generally accepted business practices.

    > Uh, casper, do you think everybody takes a university-level accounting class?

    Gee, do you think that trading stocks without even knowing what GAAP is and why it matters is just asking for it?

  7. I’ll be the brave fool to admit that I hadn’t ever heard of the acronym GAAP. On the other hand, I *have* heard of generally accepted accounting principals. I wasn’t too impressed with my high school economics class anyway. The teacher had a habit of trying to make the math sound big and scary, when most of it was just common sense (or simple arithmetic).

  8. Ummm, yes, I do think it is possible to be trading stocks, be quite serious, and simultaneously never have heard of the acronym GAAP. One such situation would be for a non-english-speaking european.

  9. Cooney says:

    Um, Mikael, there is almost certainly a GAAP equivalent that any savvy European should know about. If you’re just flying by the seat of your pants, you’re going to get burned.

  10. John says:

    *Trading* stocks has little to do with reading financial statements and understanding things like GAAP vs. non-GAAP. *Investing* involves these things, but *trading* is about market timing and psychology.

  11. BBA says:

    That’d be Principles, GAA Principles. As in, not any (more).

  12. ces says:

    Well there isn’t necessarily anything bad about reporting non-GAAP numbers as long as everyone is clear about what got left out. On the other hand anyone who can read a financial statement can come up with those numbers on their own.

    EBITDA used to be another popular way of reporting non-GAAP numbers and is a useful way of looking at startups sometimes.

    If you are investing you really do need to learn how to look at the numbers yourself and decide if a company is a worthwile investment and more importantly if the management is trying to pull some sort of funny business. Things like ‘one-time’ writeoffs that occur every other quarter or declining cash flow hidden by investment gains.

    As for general investment strategy, Buffett probably has the right idea: keep it simple stupid and only invest in businesses an idiot can understand.

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