Looking at the last 10 years of reports and accounts for every firm listed on the FTSE 100, AJ Bell found the difference between stated operating profit and the numbers presented on an adjusted, pro forma or underlying basis hit 51% in 2016.
The gap is at its highest level in a decade and could be evidence of some companies presenting figures in a positive light to inflate share prices.
Russ Mould, investment director at AJ Bell, said there are two possible interpretations for the trend.
“Either, companies are simply being more transparent, providing greater clarity to shareholders on the many moving parts which make up their business and enabling investors to get a better view of what is really going on under the bonnet,” Mould said.
“Or, companies are instead intentionally muddying the waters,” he added.
Positive gloss
Among the tactics that could be being used include presenting sale figures in multiple formats or selectively choosing underlying metrics to publish first in regulatory announcements in order to put a “positive gloss” on results, Mould said.
Ultimately this could result in a higher share price and boost the value of executives’ shareholdings, or could help the firm hit targets in order to release bonuses or share and stock rewards.
With regulators clamping down on less-than-transparent reporting of accounts, Mould said investors need to be on their guard.
He said: “All of this flags the importance of understanding how companies not just make a profit but how they present and report it. Investors need to be even more diligent than ever when it comes to doing their research.
“Ultimately clarity and consistency of reporting standards are a good sign. Restatements and obfuscation are not.”
