Warren Buffett blasts ‘one of the shames of capitalism’

This post was originally published on TKer.co.

Warren Buffett thinks this whole discussion of whether or not a company beats expectations is problematic.

In his new annual letter to Berkshire Hathaway shareholders, the billionaire investor didn’t hold back his feelings (emphasis added):

There are two types of reported earnings, and both have shortcomings 👎

Each quarter, every publicly traded company is required to report detailed quarterly financial results in accordance with generally accepted accounting principles (GAAP) as defined by the Financial Accounting Standards Board.

GAAP allows for some flexibility in how companies do their books including how revenue is recognized and how expenses are accrued. The more liberties a company takes in its accounting, the more it may be accused of committing accounting shenanigans or even outright accounting fraud.

But ultimately, GAAP is considered very rigid as it forces companies to incorporate items that are arguably non-recurring or have values that can be very volatile over short periods of time.

As a result, many companies will report a second set of numbers adjusted for these items at the discretion of management. This process gets you what are often referred to as operating earnings, adjusted earnings, pro-forma earnings, or non-GAAP earnings. Management will tell you these earnings better reflect the underlying, ongoing health of the company.