Lots of Gaps in non-GAAP Reporting
Financial accounting metrics at companies are going far beyond the guidelines that fall under generally accepted accounting principles, reports the Wall Street Journal.
Nearly all large public companies now report non-GAAP metrics in their financial statements. In 1996, around 60 percent of S&P 500 companies reported at least one non-GAAP earnings-per-share figure. Today, according to Audit Analytics, it is over 97 percent.
Additionally, the discrepancy between GAAP and non-GAAP measures has been growing, with non-GAAP measures more favorable. In 2015, pro forma earnings-per-share were 30 percent higher on average than GAAP EPS for companies in the S&P 500, according to a post on Harvard Law School Forum on Corporate Governance and Financial Regulation.
The tech industry is among the biggest offenders, where some companies tweak their top and bottom lines. “Uber uses non-GAAP ‘core platform adjusted net revenue,’ which attempts to strip out recurring costs it incurs to grow in competitive markets,” reports the WSJ.
The SEC continues to express concern; saying it has increased scrutiny over companies that use non-GAAP reporting.
SEC Expands “Test-the-Waters”
The SEC announced that it has voted to expand a popular modernization reform that will enable all issuers to engage in test-the-waters communications with qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”) prior to, or following the filing of a registration statement for a securities offering.
Under this new rule (163B), these communications will be exempt from restrictions imposed by Section 5 of the Securities Act that prohibited written and oral communications prior to the filing of registration (a violation referred to as “gun-jumping”) and that limited written offers to a “statutory prospectus.”
The expanded test-the-waters provision will provide all issuers as well as any person authorized to act on its behalf, including underwriters, with flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protections, according to the SEC.
“The final rule benefits from the staff’s experience with the test-the-waters accommodation that has been available to emerging growth companies (EGCs) since the Jumpstart Our Business Startups Act (JOBS Act),” said SEC Chairman Jay Clayton. “Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.”
The new rule is one of several SEC initiatives that build on JOBS Act provisions intended to encourage companies to access U.S. public markets.
The rule becomes effective 60 days after publication in the Federal Register.
SALT in the Wound: Lawsuit Dismissed
Back in July 2018, the states of New York, New Jersey, Connecticut and Maryland brought a lawsuit against the U.S. Treasury and the IRS alleging that the new limit on State and Local Tax (SALT) deductions, part of the Tax Cuts and Jobs Act of 2017 was “an unconstitutional assault on states’ sovereign choices.”
The new $10,000 cap on state and local tax deductions that filers can claim on their federal income taxes especially impacts taxpayers residing in states with high income and property taxes.
U.S. District Judge J. Paul Oetken in Manhattan dismissed the action on September 30, 2019, ruling that the plaintiff states ultimately failed to show that the SALT cap was unconstitutionally coercive or that it imposed on their own sovereign rights, reports CNBC.
“The SALT cap simply requires the states to either exercise sovereign powers, howsoever they wish, to avert or assuage the cap’s effects or else suffer the uncertain budgetary effects of doing nothing,” Oetken wrote in his opinion.
According to the Tax Policy Center, in 2016, New Yorkers writing off state and local taxes took an average SALT deduction of $21,779. This compares to California’s $18,770, New Jersey’s $18,092, and Connecticut’s $19,563.
Responsible Accounting Standards Act
Representative Blaine Luetkemeyer (R-MO.) has introduced a bill (H.R. 4565) that would force the Financial Accounting Standards Board (FASB) to go through a due diligence process to assess the impact of all new accounting standards before finalizing them.
Under the bill, named the Responsible Accounting Standards Act of 2019, the FASB would have to consider the effect a new accounting standard would have on the broader U.S. economy, market stability, and availability of credit.
Under current law, FASB and its overseer, the Financial Accounting Foundation (FAF) are independent, private-sector organizations that fall outside the purview of the laws that govern regulatory rulemaking and as such don’t require adequate assessments before implementing standards, according to Luetkemeyer.
“This bill will not take away FASB’s independence, but it will force them to perform the due diligence they have proven unwilling to do,” he wrote in an opinion piece appearing in The Hill. He introduced the bill to force FASB to follow the Administrative Procedures Act (APA) and abide by the same rulemaking guidelines in place for every federal financial regulator, including the Federal Reserve. The APA requires regulators to make proposed rules available for public comment, use the feedback to form a final rule, and perform a cost benefit analysis if a rule is considered economically significant.
Representative Luetkemeyer is a ranking member of the Financial Services Subcommittee on Consumer Protection and Financial Institutions and has been an outspoken critic of the FASB’s Current Expected Credit Losses standard (CECL). Although FASB has delayed the effective dates of CECL for some entities, congressional lawmakers have introduced bills to delay CECL implementation until a study on its impact is done.
A fundamental shift in the spending habits of U.S. millennials will have an incredible impact on the world’s largest economy, according to the CEO of Smead Capital Management. In an interview with Nightly Business Report, Bill Smead predicted that in the next decade millennials will move away from buying discretionary items and shift purchases to homes and cars. A Pew Research report citing the latest U.S. Census data expected millennials to surpass the baby-boomer population in 2019. It projected Generation X to surpass boomers by 2028.
“So, we have got 89 million people in between 21 and 38 years old that are about to start their lives, form households, do incredibly economically impactful things…and we are giving them the lowest interest rates in the history of the United States of America to form their lives. We are practically giving them the money to buy houses and buy cars etc.,” says Smead.
“Just do the math, there’s 89 million millennials in a 330 million population of the United States of America. And then the group behind them – this is crazy – is just as big.”
“In 20 years, there is going to be way more payers into the social security system and there is going to be way fewer taker-outers – and that problem will solve itself through demographics,” Smead said.
Happy Birthday Google – and many happy returns
Google, which turned 21 last month, has a lot to celebrate. So do its early investors.
Its success since going public has turned out to be pretty good for shareholders. A $1,000 investment in 2009 would be worth more than $4,800 as of October 2, 2019 for a total return of around 400% according to CNBC calculations. The same investment in the S&P 500 would have delivered just a bit more than 250%.
Simply Stated Thoughts…
The Right People for the Right Job
If your company has a problem in recruiting the right person for the right position, try this simple experiment to place your employees where they belong.
Put about 100 bricks in no particular order in a closed room with an open window. Then send 2 or 3 candidates in the room and close the door. Leave them alone and come back after one hour and then analyze the situation.
If they are counting the bricks: Put them in the Accounting Department.
If they are re-counting them: Put them in Auditing.
If they have messed up the whole place with the bricks: Put them in Engineering.
If they are arranging the bricks in some strange order: Put them in Planning.
If they are throwing the bricks at each other: Put them in Operations.
If they are sleeping: Put them in Reception.
If they have broken the bricks into pieces: Put them in Information Technology.
If they are sitting idle: Put them in Human Resources.
If they say they have tried different combinations, yet not a single brick has been moved: Put them in Sales.
If they have already left for the day: Put them in Marketing.
If they are staring out of the window: Put them on Strategic Planning.
If they are searching for defects: Put them in Quality Control.
If they are analyzing the quality, reliability and mode of the bricks: Put them in Contracting & Procurement.
And then last but not least: If they are talking to each other and not a single brick has been moved: Congratulate them, and put them in Top Management!
An Audited Legacy of Quality
It’s become a lot easier to choose the best audit firm. That’s because the Public Accounting Oversight Board (PCAOB) conducts periodic inspections of all audit firms and publishes its reports online. For all to see.
Yes, we get audited too.
Weinberg & Company is consistently at the very top when it comes to the quality of our work– just check our legacy of stellar inspection reports.
We thought we were building a leading, international accounting firm by providing Big 4 expertise, delivered with personal service.
Turns out we were also building “An Audited Legacy of Quality.”