Cigna Corp. included adjusted revenue in its first-quarter earnings published on Friday, a metric that does not conform with the Securities and Exchange Commission’s guidelines on how companies are allowed to use nonstandard numbers in their financial reporting, according to experts.
The SEC issued new guidelines for corporate reporting in 2016 in an effort to slow the proliferation of non-GAAP numbers — that is, financial figures that are not in accord with generally accepted accounting principles, the U.S. standard — and rein in the worst offenders. The SEC allows companies to use non-GAAP numbers to supplement their reporting, but they must give equal or greater prominence to GAAP numbers and explain how the two are reconciled.
Since then, it has issued comment letters to many companies for adjusting their revenue and for using what it calls “individually tailored recognition and measurement” methods, because they substitute the company’s own interpretation of accounting standards for GAAP.
Cigna defines adjusted revenue as ” total revenues excluding the following adjustments: special items and Cigna’s share of certain realized investment results of its joint ventures reported in the Cigna Healthcare segment using the equity method of accounting. ”
Cigna’s most recent proxy shows that the adjusted revenue metric is also one of three used to determine executive compensation, along with adjusted income from operations and strategic priorities.
The equity method of accounting is how the company records gains or losses in investments in other companies in which it has significant stakes. It adjusts the value based on the percentage of an equity investment.
Those investments contributed just over $100 million to revenue in the latest quarter, after adding $14 million in the previous year, but that revenue would not be counted under GAAP. CIGNA created an adjusted revenue figure of $44.1 billion, versus GAAP revenue of $44.0 billion. The FactSet consensus was for revenue of $43.4 billion.
In the footnotes to its earnings, Cigna explains that adjusted revenue “permits analysis of trends in underlying revenue.”
Experts said last quarter that it’s not allowed under SEC rules, as Cigna has no control of over those line items for its equity method investments but they do affect the real income and value of the company and should be included.
“The SEC is still addressing non-GAAP adjustments to revenue in a one-off, inconsistent way,” said Francine McKenna, an accounting expert and incoming faculty at the Wharton School of the University of Pennsylvania. (McKenna is a former MarketWatch reporter.)
“That gives companies like Cigna leeway to keep violating clear guidance prohibiting what the SEC calls ‘individually tailored’ accounting. Adjustments to revenue that create ‘made to order’ numbers just because you don’t like what standard GAAP does to your results are not allowed.”
Cigna responded to a request for comment by reiterating the statement sent last quarter:
“The integrity of our financial reporting is paramount for our company, and our presentation of Other Revenues and non-GAAP measures is in full compliance with SEC rules and related SEC staff interpretations. Our company’s reporting on adjusted revenues has been consistent and fully transparent for the past several years and enables investors to better analyze and assess the underlying performance of our business, as a supplemental measure to GAAP revenue.
“SEC staff interpretations on individually tailored revenue recognition methods are focused on prohibiting the improper acceleration of revenues from future periods into current periods, which is something we unequivocally do not do. Our calculation of adjusted revenue excludes items that are not reflective of the run rate of our business, and in fact, in many periods result in our adjusted revenue being lower than GAAP revenue. It is our firm belief that this metric does not constitute use of an individually tailored revenue recognition method.”
Cigna shares were down 1.8% Monday, but have gained 15% in the year to date, while the S&P 500
has fallen 15%.