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Investors should always take the critical step of reading the financial statements of the companies they've invested in, or intend to invest in, because financial statements contain important corporate financial information that may not be readily apparent from news releases. Recently, some companies have put out press releases using so-called "pro forma" financial information to highlight what they claim are important portions of their actual financial reports.

Investors should know that "pro forma" financial information is not prepared in accordance with the standards applied to financial statements filed with the SEC. In other words, some of the numbers announced by companies in their "pro forma" financial information may be based on assumptions or principles that are not recognized as appropriate for SEC filings, and that an accompanying news release doesn't discuss or otherwise explain. While they aren't illegal - and in some cases can be helpful in focusing attention on critical portions of financial statements - "pro forma" financials have limitations, might create a confusing or misleading impression, and should be viewed with appropriate and healthy skepticism.

The federal securities laws require most publicly held companies to file with the SEC financial statements prepared under a set of accounting conventions called "Generally Accepted Accounting Principles" (GAAP) that are accurate, truthful and complete. When a company prepares its financial statements using GAAP, investors can more consistently track the company's financial results from year to year and compare its performance with other companies.

In contrast, "pro forma" financial results aren't prepared using GAAP, and they may not convey a true and accurate picture of a company's financial well-being. They often highlight only positive information. And because "pro forma" information doesn't have to follow established accounting rules, it can be very difficult to compare a company's "pro forma" financial information to prior periods or to other companies.

Here are a few things to keep in mind when you see "pro forma" financial information.

  • What is the company assuming? "Pro forma" financial results can be misleading, particularly if they change a loss to a profit or hide a significant fact. For example, they may assume that a proposed transaction that benefits the company has actually occurred. Or they may fail to account for costs or charges. Be sure to look behind the numbers, and find out what assumptions the numbers are based on.

  • What is the company not saying? Be particularly wary when you see "pro forma" financial results that only address one component of a company's financial results - for example, earnings before interest, taxes, depreciation, and amortization (which is often abbreviated "EBITDA"). These kinds of statements can be misleading unless the company clearly describes what transactions are omitted and how the numbers might compare to other periods.

  • How do the "pro forma" results compare with GAAP-based financials? Because "pro forma" information comes from selective editing of financial information compiled in accordance with GAAP, "pro forma" financial results can raise a serious risk of misleading investors - even if they do not change a loss to a profit. Look for a clear, comprehensible explanation of how "pro forma" results differ from financial statements prepared under GAAP rules, and make sure you understand any differences before investing on the basis of "pro forma" results.

  • Are you reading "pro forma" results or a summary of GAAP-based financials? Remember that there is a big difference between "pro forma" financial information and a summary of a financial statement that has been prepared in accordance with GAAP. When financial statements have been prepared in compliance with regular accounting rules, a summary of that information can be quite useful, giving you the overall picture of a company's financial position without the mass of details contained in the full financial statements. It is always best, however, to compare any summary financial presentation you read with the full GAAP-based financial statements.

Read before you invest; understand before you commit. Remember that "pro forma" financial information you see in a press release wasn't prepared according to normal accounting conventions, and make sure you have the full story before investing. You can access and download for free a company's financial statements from the SEC's "EDGAR" database of corporate filings at www.sec.gov/edgar/searchedgar/webusers.htm. There you'll find annual reports on Form 10-K, quarterly reports on Form 10-Q, and many other filings.

If you've got questions, you can contact the SEC's Office of Investor Education and Assistance for help. You can send us your complaint using our online complaint form at www.sec.gov/complaint.shtml.