Pro Forma

The management decision to use pro forma numbers has attracted a profound debate in recent times. Some studies indicate that the pro forma numbers are informative while others assert that they are misleading to the investors. Research indicates that pro forma reporting is employed by corporate managements to deceive and manipulate the investors. Conversely, experts observe that pro forma reporting is makes financial numbers more appropriate (Frederickson & Miller, 2004).

            Critics of pro forma numbers including accounting regulators and capital market authorities believe that they are meant to mislead the investors while serving the managers. Companies utilize pro forma means of reporting finances to paint a rosy picture and therefore this practice should not be allowed to continue, the pro forma might be used even when the organization is on the downward trend.  Stern adherence to generally accepted accounting principles (GAAP) and IFS standards should be observed to protect the financial investors (Aubert, 2010).  

            Cyran and Cox (2010) observe the deteriorating performance of Hewlett-Packard (H.P) after the change of management. The pro forma outcomes doubled as the cash flow from operations increased by about two-thirds under Mr. Hurd.  Apparently, its shares are not really the good deal they seem to be. The situation is because they are trading at less than ten times estimated pro forma earnings for the current financial year.

            General motors, a major player in automotive industry recently disclosed some probable risks to investors. Some among them were pro forma, like insecurity of car sales and delay in filing for the I.P.O due to change in management. The firm also disclosed its weakness in internal financial reporting that is affecting its business plan. Corcoran (2010), a Wall Street Journal blogger recount the Apache-Mariner deal, which is very misleading to the investors. The information implies that the financial values are not properly audited.

                                               

References

Aubert, F. (2010). The relative informativeness of GAAP and pro forma earnings announcements in France. Journal of Accounting and Taxation , 1-14.

Corcoran, G. (2010, August 4th). Oil M&A: Final Details of the Apache-Mariner Deal. Retrieved September 2nd, 2010, from The Wall Street Journal Blog: http://blogs.wsj.com/deals/2010/08/04/oil-ma-final-details-of-the-apache-mariner-deal/?KEYWORDS=pro+forma

Cyran, R., & Cox, R. (2010, August 10). Assessing H.P. After Mark Hurd. Retrieved September 2nd, 2010, from The New York Times, Business Day: http://www.nytimes.com/2010/08/11/business/11views.html?_r=3&scp=1&sq=pro%20forma&st=cse

Frederickson, J., & Miller, J. (2004). The effects of pro forma earnings disclosures on analysts’ and nonprofessional investors’ equity valuation judgments. Accounting Review , 79 : 667 – 686.