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Fathoming Financial Statements

Financial data isn’t as black and white as you might think. Accounting rules are as open to interpretation as laws are. Although the Securities and Exchange Commission (SEC) requires companies to report information in specific formats and at specific times, companies have some leeway in how they present their financial data—and they use that leeway to portray their performance in the best possible light. Data providers analyze the data that companies report and tweak it in various ways to better reflect company performance or to make it easier to compare competitors—all in an effort to add value for their clients and earn their subscription fees.

After the 1929 stock market crash and the Great Depression, Congress stepped in to try to prevent similar catastrophes. The Securities Act of 1933 requires companies to publish financial information about the securities they sell to the public. The Securities Exchange Act of 1934 directs the operation of securities markets and brokerage firms, defines the rules for purchasing securities on margin, and outlines access to financial information. These two acts are the basis for the contents, disclosure requirements, and frequency of reporting for today’s financial statements.

The SEC oversees compliance with these acts. Companies must provide unaudited financial information for each quarter, called 10-Qs, within 45 days of the end of the quarter. Annual reports, called 10-Ks, must be audited by independent third ...