Technology Companies’ Creative Accounting Practices May Falsely Inflate Profits

Ever since the ill fated internet boom of 1999, technology shares have had a controversial impact on the stock market. As of right now, technology shares are driving much of the stock market including the Nasdaq 100 and Standard & Poor’s 500-stock index, both tech heavy and both rising over the last 12 months.

Financial analysts worry that the foundation of these successful technology shares is one built more on fiction than fact. Enthusiastic investors might lap up the premium stocks based on positive numbers being reported by tech companies, however many popular companies appear to be reporting numbers that exclude the actual costs of doing business.

All corporations are required to report their financial statistics under generally accepted accounting principles (GAAP). However, many tech companies have been found turning away from GAAP and instead focusing on numbers that favor tech companies.

Not all tech companies are guilty of this. Giants like Apple and Netflix only report GAAP results, but companies like them are few and far between.

The crux of many of these creative accounting measures are stock-based compensation plans for employees. Companies rewarding stock benefits to employees are in fact racking up millions of dollars in losses, losses that impact the company’s actual earning potential. These include stocks awarded to executives.

A representative from Salesforce.com, a company that under GAAP suffered a $146 million operating loss but reported a $574 million operating profit by excluding $565 million worth of stock grants, offers an explanation for this strange behavior.

According to their representative, stock based expenses vary for reasons unrelated to the operational decisions that impact a company’s actual performance. As a result, Salesforce.com did not believe the numbers needed to be included in evaluations of the corporations’ financial success.

While Salesforce.com and its compatriots are not necessarily in the wrong, investors and financial analysts would be wise to compare financial reports from tech companies to other sources when considering the impact technology shares could have on a portfolio.