Unfortunately, several of the necessary adjustments are manual in nature and require specific analysis to arrive at the proper adjustment to achieve uniformity. In other words, one cannot simply “add-back” or “subtract-out” a financial statement item to create an apples-to-apples comparison of company activity.
An example comes from mergers and acquisitions accounting, which even in “low” M&A environments can create massive inconsistencies in financial reporting.
Most of the world’s governing accounting bodies have disallowed the pooling of interests method of accounting for acquisitions. Under the governing “purchase method” rules, significant material distortions arise in assets, earnings, liabilities, reported cash flows, and even revenue. The problem is that the date of the acquisition drives the income statement and cash flow statement, while the balance sheet is unaffected. At the end of the year, the parent company reports an acquisition fully on the balance sheet, with goodwill.
However, the impact on the income statement and the cash flow statement is wholly dependent on the acquisition date. An acquisition early in the parent company’s fiscal year will show much of the target firm’s revenue, earnings, and cash flow. An acquisition at the end of the year will show almost none of it.
The mismatch between the balance sheet and the inconsistent income and cash flow statements is obvious. The fix requires an analyst to manually examine the data, and while systematic in nature, create a manual “fix.”
Unfortunately, many of the required adjustments to repair material inconsistencies require good old-fashioned elbow grease by a seasoned financial analyst. The quality of financial reporting is sufficiently inconsistent such that an automated “spreadsheet” will not repair many of the material distortions.