American Express, Fifth Third Cited for Accounting Moves

Wall Street’s watchdog is making good on its promise to crack down on companies that use unofficial earnings measures to strip out the effect of the biggest change to bank accounting in decades.

The Securities and Exchange Commission has warned American Express Corp. and Fifth Third Bancorp to refrain from touting earnings metrics that essentially undo the current expected credit loss (CECL) accounting standard, according to comment letters the regulator released recently.

Companies are allowed to use measures that don’t comply with U.S. generally accepted accounting principles—non-GAAP—to weed out unusual, one-time expenses or to show their performance in a way the rules don’t fully capture. These measures must be used sparingly and can’t overshadow official results.Shortly before the new credit loss standard went into effect this year, the SEC added another warning: Companies can’t use unofficial results that convey their earnings as if they hadn’t adopted the accounting change at all.

American Express in an April 24 earnings release used a measure called “adjusted diluted earnings per common share excluding credit reserve builds.” Its official earnings per share was 41 cents; the non-GAAP adjusted figure painted a more flattering picture, $1.98 per share.

Fifth Third in its April 21 earnings release used several non-GAAP measures calculated using an adjusted net income figure that excluded “provision in excess of credit losses,” the SEC said. The adjusted numbers showed what various measures would have been if they didn’t have to comply with the sweeping new accounting standard.

These types of performance measures violates Rule 100(b) of Regulation G by substituting individually tailored recognition and measurement methods for those of GAAP, the SEC told both companies.

“That’s a no-no; that’s why they got busted,” said Mike Walworth, CEO of GAAP Dynamics, an accounting training firm.

New rules

The current expected credit loss rule went live for large publicly traded companies on Jan. 1. Issued by the Financial Accounting Standards Board as the accounting rulemaker’s central response to the 2008 financial crisis, it requires businesses to look to the future and calculate losses before customers miss any payments.

The new calculation technique, plus uncertainty about the coronavirus pandemic, meant most banks’ expected losses soared. This made them boost the provisions they book for credit losses, which is an expense that hits net income.

Bank earnings tanked in the first and second quarters, in part because of huge provisions.

“If you start taking out the provision, then it starts looking too rosy,” Walworth said.

American Express said in its June 16 response to the market regulator that it used the adjusted earnings per share measure because it wanted to give investors an apples-to-apples comparison to guidance it provided in a March 17 investor call. In the call, the credit card company said economic volatility from the coronavirus pandemic made it difficult to estimate what credit loss reserves would be at the end of the quarter, on March 31. The EPS guidance the company offered at the time didn’t include a portion of the provision for credit losses.

The adjusted measure in the April earnings release “was intended to allow investors to compare the company’s results with the adjusted EPS guidance range provided on March 17 and better understand what had and had not changed since March 17,” an American Express spokesperson wrote in an email to Bloomberg Tax. “We were trying to provide what we thought was appropriate and helpful disclosure to investors under the circumstances.”

Fifth Third declined to comment.

Both American Express and Fifth Third told the SEC in published responses that they would refrain from using similar measures in future filings or press releases. Fifth Third’s July 2 response to the SEC didn’t include a justification for the measures.

Non-GAAP in crosshairs

Investors have a love-hate relationship with non-GAAP measures. Some measures paint a more accurate portrait of a company’s performance. Others they criticize for overly optimistic portrayals.

Sometimes companies use non-GAAP measures that strip out new accounting changes to preserve continuity from period to period, said Jack Ciesielski, publisher of the Analysts Accounting Observer.

“I can understand wanting to preserve continuity,” Ciesielski said. “That’s the only possible acceptable excuse for doing so. I don’t think that’s a really great reason.”

The SEC’s Division of Corporation Finance publishes comment letters it sends to companies and their responses once all matters are resolved. The process can take months. The letters are not sanctions or investigations, but they’re considered headaches for companies. Companies have to draft responses, either defend or back down from the accounting they used, and then wait for the SEC to respond. If the regulator isn’t satisifed with the company’s answer, more letters follow.

The majority of businesses didn’t use non-GAAP measures to convey their earnings as if they hadn’t adopted the credit loss accounting change, a Bloomberg Tax and Accounting review of SEC filings shows.One exception was Credit Acceptance Corp. In its first-quarter earnings release, the subprime auto lender used adjusted net income, which it said did not include a provision for credit losses as calculated by the new accounting rules.

Some banks used measures based on “pre-tax, pre-provision” income, but this could be a gray area in terms of compliance with SEC rules, Walworth said.

“For anything non-GAAP, there has to be a reason,” he said.

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