NEW YORK — Unicorns and the use of non-GAAP performance measurements have risen together and that's not a coincidence, Drew Bernstein, co-managing partner of consulting and auditing firm Marcum Bernstein & Pinchuk, said at CFO Live here last week.
Measures that don't adhere to generally accepted accounting principles (GAAP) give digital companies a way to attract investors by showing they are innovative and growing even if they aren't generating a profit and that can be valuable, said Bernstein, whose firm provides services to companies in China.
But using non-GAAP measures has become an art unto itself and obscures rather than illuminates how well a company is performing. "Investors are getting to the point where they're asking, 'How do you make money?'" he said.
Bernstein pointed to Uber, whose financials include 15 pages of definitions explaining its non-GAAP numbers. "It's almost impossible to go through," he said.
These definitions can overwhelm investors even before they get to the GAAP numbers. And that goes against the spirit of GAAP, which is meant to create a uniform way to analyze company performance.
"You shouldn't have to read through eight pages of definitions to figure out what the company did," he said.
James Chanos, the investment manager who leads Kynikos Associates, a short-selling fund, has called the metrics "legal fraud."
Bernstein said he wouldn't go that far — maybe "legal deception" — but it appears to be something companies are abusing.
He pointed to a case where a company that had $5 billion in losses on a GAAP basis touted $200 million in profit from community-based earnings before interest, tax, depreciation and amortization (EBITDA).
Other unusual non-GAAP metrics include "total revenue other bets" and "structuring adjustment EBITDA."
WeWork, which had to pull its planned September initial public offering after it became clear investors wouldn't pay anything close to the floated share price, used several non-GAAP measures. And BlackBerry, the one-time handset leader that's been struggling to make a comeback in a market dominated by Apple and Samsung, was slapped with a warning in June by the Securities and Exchange Commission for leading its financial reports with non-GAAP numbers.
The SEC requires that companies lead with GAAP measures, and give both GAAP and non-GAAP numbers equal prominence.
Bernstein said he'd like to see the accounting profession develop a policy and controls for non-GAAP measures, especially since some executives' compensation is based on performance under some of these measurements.
"You need integrity or you won’t have a market," Bernstein said. Instead, you'll have a casino, he said.