• Congress tightened Pro Forma rules to restrain Wall Street.barbie street image by Roques Jean Chris from Fotolia.com
  
  The Sarbanes-Oxley Act of 2002 attempted to introduce stricter compliance standards for U.S. public corporations, among them new reporting requirements for earnings announcements, periodic disclosures of earnings and Pro Forma statements. The Federal Securities Exchange Commission (SEC) subsequently formulated new rules implementing those sections of the act relevant to Pro Forma requirements, the technical name for public disclosures of a corporation's assessments of its future financial condition.
  
  

Non-GAAP Financial Assessments

• In March 2003, the SEC released "Final Rule: Conditions for Use of Non-GAAP Financial Measures," related to public companies' disclosure of financial information. Consisting of several different rulings and amendments, the final rule, known as "Regulation G," required public companies to release financial assessments based on "generally accepted accounting practices" (GAAP). While companies could continue to release documents disclosing results obtained by other means, they must also provide results obtained by comparable GAAP methods, along with a reconciliation of the two results.
  
  

Effect of Regulation G on Pro Forma Statements

• Pro-Forma financial statements express in a formal way a company's reasonable expectations going forward: the prospects for future earnings and expenses in relation to past earnings and expenses, and the probable effect of operational or organizational changes. A national fast food company that owned its own restaurants might decide, instead, to sell its restaurants to franchisers, thus increasing capital and reducing overhead. A Pro Forma statement projects the results of that change. Some past Pro Forma statements, Congress has noted, reflected reality less than they did a hope for increased profits and earnings that might incline investors to buy stock. These statements used non-GAAP methods to achieve these results. Regulation G's requirement, that companies releasing non-GAAP results must also release GAAP results and an explanation of the difference between them, allowed investors to compare the Pro Forma statements of different companies according to a single standard.
  
  

Corporate Responsibility for Pro Forma Statements

• One section of the new rules addressed the relationship between a company and its auditors, requiring auditors to take new legal and financial responsibility for compliant Pro Forma statements. It also required a company to have an internal audit committee that reviews and pre-approves all audit reports, among them the Pro Forma statement, and requires certain company officers to state that they have reviewed these reports, approved them and taken responsibility for their accuracy.
  
  

Effectiveness of Sarbanes-Oxley and Regulation G

• Assessments of the effectiveness of Sarbanes-Oxley and Regulation G vary widely. One 2009 academic study by three well-known business management scholars determined that the act contributed to "a significant reduction in compensation-based [management] incentives to take risks," which, although not directly related to more credible Pro Forma statements, reflects a less exuberant, more responsible management culture. Nevertheless, the 2008 financial meltdown has been associated with exactly the tendencies Sarbanes-Oxley and Regulation G supposedly inhibited: unrealistic corporate assessments of risk and rewards going forward that ultimately cost the investors Sarbanes-Oxley was crafted to protect hundreds of millions, and perhaps billions, of dollars.