Question:
Companies often voluntarily provide a pro forma earnings number when they announce annual or
quarterly earnings.
These pro forma earnings numbers are controversial as they represent management’s view of permanent
earnings. The Sarbanes-Oxley Act (SOX), issued in 2002, requires that if pro forma earnings are included
in any periodic or other report filed with the SEC or in any public disclosure or press release, the
company also must provide a reconciliation with earnings determined according to GAAP.
Professors Entwistle, Feltham, and Mbagwu, in “Financial Reporting Regulation and the Reporting of Pro
Forma Earnings,” examine whether firms changed their reporting practice in response to the pro forma
regulations included in SOX.
Required:
1. In your library or from some other source, locate the indicated article in Accounting Horizons, March
2006.
2. What sample of firms did the authors use in their examination?
3. What percent of firms reported pro forma earnings in 2001? In 2003?
4. What percent of firms had pro forma earnings greater than GAAP earnings in 2001? In 2003?
5. What was the most frequently reported adjusting item in 2001? In 2003?
6. What are the authors’ main conclusions of the impact of SOX on pro forma reporting?
Answer:
Requirement 2
The authors use the S&P 500 companies as their sample.
Requirement 3
77% in 2001 and only 54% in 2003.
Companies often voluntarily provide a pro forma earnings number when they announce annual or
quarterly earnings.
These pro forma earnings numbers are controversial as they represent management’s view of permanent
earnings. The Sarbanes-Oxley Act (SOX), issued in 2002, requires that if pro forma earnings are included
in any periodic or other report filed with the SEC or in any public disclosure or press release, the
company also must provide a reconciliation with earnings determined according to GAAP.
Professors Entwistle, Feltham, and Mbagwu, in “Financial Reporting Regulation and the Reporting of Pro
Forma Earnings,” examine whether firms changed their reporting practice in response to the pro forma
regulations included in SOX.
Required:
1. In your library or from some other source, locate the indicated article in Accounting Horizons, March
2006.
2. What sample of firms did the authors use in their examination?
3. What percent of firms reported pro forma earnings in 2001? In 2003?
4. What percent of firms had pro forma earnings greater than GAAP earnings in 2001? In 2003?
5. What was the most frequently reported adjusting item in 2001? In 2003?
6. What are the authors’ main conclusions of the impact of SOX on pro forma reporting?
Answer:
Requirement 2
The authors use the S&P 500 companies as their sample.
Requirement 3
77% in 2001 and only 54% in 2003.
