Monday, November 02, 2015

Why GAAP Is Important 

One doesn't value Generally Accepted Accounting Principles until they are ignored and a major failure results.  Consider this company.  Valeant sticks to the letter of the law by giving GAAP numbers in its press releases but it also presents and emphasizes non-GAAP earnings in which certain expenses have been deleted from the bottom line.  Hence, Valeant can show a higher earnings per share than it would under GAAP.  Now that Valeant is in trouble, its non-GAAP earnings are being held up as an example of what not to do.  The company's financial reporting has cost it credibility and its stock price, which has plummeted.  So, why do companies continue to report scrubbed numbers?  Because they can get away with it.  They honor the letter of the law but fracture its spirit.  It is poor investor relations, but look for it to continue as long as management can make itself look better.


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