Final answer:
Regulators are against pro forma earnings because they can allow companies to manipulate financial statements to appear more favorable, thus undermining transparency and accuracy. This manipulation exploits gray areas in regulations, potentially misleading investors and obscuring a company's true financial health.
Step-by-step explanation:
Regulators are often against pro forma earnings because they can facilitate manipulation of financial statements, potentially leading to less transparency and less accurate financial reporting. While pro forma earnings might attempt to present a company's financials in a more favorable light by excluding certain costs or revenues deemed exceptional or non-recurring, they can obscure the true financial performance of a company. This is because they allow companies to exclude items they consider non-representative of ongoing operations, which may not reflect the company's long-term financial health, and do not consider all potential future expenses. Therefore, regulators seek to enforce standards that provide a more consistent and reliable basis for evaluating a company's financial condition.
The practice of using pro forma earnings is controversial and may exploit gray areas in existing regulations. This exploitation poses a significant concern for both investors and regulators who strive to ensure fair trading and protect investor interests. On the other hand, some argue that pro forma results can provide valuable insights into a company's core operations and performance excluding one-time events or costs.