K.I.S.S.E.C

The Securities and Exchange Commission recently announced its intention to improve its financial reporting and disclosure system. Presumably, the SEC was motivated by the accounting scandal that brought Enron to its knees and placed every other large publicly held company in the United States under a very big microscope.

Specifically, the SEC wants such companies to move more quickly when it comes to reporting important stuff that investors need to know. Like when company “insiders” conduct transactions involving company securities. Companies would also have to expand the list of events that require disclosure--such as the departure of the company’s CEO or a waiver of corporate ethics or conduct rules by the company--and disclose its critical accounting policies.

The commission also wants publicly held companies to file annual reports within 60 days of the end of the fiscal year; currently they have 90 days to do so. Filings of quarterly reports would similarly be accelerated. Companies would have to file their reports within 30 days after the end of the quarter, instead of the current 45 days.

Bravo. But the SEC didn’t go far enough. There is little to be gained by getting more information faster if the recipient can’t make heads or tails out of what he or she is reading.

The SEC needs to streamline how quarterly and annual financial results are reported to the public. And they need to keep it simple. It’s the same principle that drove the proposed simplification of the federal tax code a few years back. We’re hoping this suggestion gains more traction.

Making sense of financial statements often is a giant headache. And we do this for a living. It’s not that the numbers themselves are so hard to absorb. It’s that there are so many accepted ways of reporting the numbers--net income, pro forma earnings, EBITDA and then some. Also, reporting methods vary greatly from company to company. Put it all together and it is extremely challenging--and sometimes next to impossible--to make sense of it all.

The SEC should settle on one reporting mechanism. The folks at investopedia.com like EBITDA because it eliminates the effects of financing and accounting decisions on a company’s profitability.

But both EBITDA and pro forma methods are a convenient way to hide bad news or misleading earnings, as happened with Global Crossing’s bandwidth swaps. For that reason, net income might be a better choice. This is the money that came in. This is the money that went out. Simple and clean. No one-time charges or other accounting hocus-pocus.

The SEC knows more about this than just about anyone, or at least it should. The commission should pick the reporting method that provides the truest picture of a company’s financial situation. Then they should make every company stick to it. And punish those who don’t. That way, investors will less likely be punished by unscrupulous--or stupid--accounting practices.