Heard on the Street: Investors have reason to worry as creative accounting metrics from companies like Uber and WeWork have become more prevalent.
Financial accounting metrics at companies ranging from Uber Technologies to Beyond Meat to We Co. have gotten creative, going far beyond the guidelines that fall under generally accepted accounting principles.
The tech industry is among the biggest offenders and, not coincidentally, sector participants are highly unlikely to have positive net income according to normal accounting rules. Some companies tweak their top lines as well as their bottom lines. Uber, for example, uses non-GAAP “core platform revenue,” which attempts to strip out recurring costs it incurs to grow in competitive markets.
The number of companies reporting non-GAAP numbers has proliferated. In 1996, only 59% of filers used non-GAAP figures according to firm Audit Analytics. By 2017, that had grown to 97%. A gander at the wide range of valuations that non-GAAP creativity implies shows just how dangerous creative accounting can be for investors, too. Zion Research Group recently calculated Ebitda figures four different, but often used, ways for companies in the S&P 500 by sector.
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