Many companies have used pro forma earnings disclosures to report favorable earnings in the newspapers. In 2001, the SEC issued a statement limiting the use of pro forma earnings. The SEC requested that companies disclosing pro forma earnings include are conciliation between pro forma earnings and earnings accord-ing to the financial reporting framework.
Refer to the description in the text of eToys and its use of pro forma earnings. This disclosure was made before the SEC issued its recommendation to include earnings according to the financial reporting framework in the press release.
a. What did eToys gain by issuing a press release using only pro forma earnings?
b. Explain how the SEC’s recommendation improves the quality of information available to outsiders.
c. When you are an auditor, would you (a) encourage, (b) discourage, or (c) be indifferent to your client’s use of pro forma earnings in press releases?