Sunday gravy: Throw Lyft's typo in the pot, stir in an SEC amicus brief, Ray Ball's opinion about the accountant shortage, and some fricassee of Trump

I am busier than ever but industry and professional news seems to follow me wherever I'm hiding, trying to get some presentations ready.

“Everything you see I owe to pasta.” Sophia Loren

Lyft

It was the earnings release heard 'round the world. On St. Valentine's Day Eve, after the market closed, Lyft Inc. issued a massive correction to its outlook for its earnings margin in 2024, the one originally filed with SEC's Edgar earlier in the day.

Bloomberg reported at 5:57 pm that Lyft issued a correction and revised that its margin was expected to expand…

But the damage was already done.

"The blowout forecast may have contributed to a surge in Lyft’s shares in after-market trading on Tuesday. The stock jumped as much as 67% on the company’s outlooks before erasing gains during the call with investors. It was up 20% at 5:52 p.m. in New York."

Yikes!

Everyone, and I mean everyone, wrote about it, trying to figure out how such a crazy thing could happen.

MarketWatch's Therese Poletti had the column I would have done in reaction that same night (she's based in San Francisco):

The snafu shows how much Wall Street relies on and perpetuates its useless and mind-numbing jargon, which is probably not quickly understood by average retail investors. That's another way the house wins.

Investors already have to deal with jargon in the description of the metric itself - adjusted Ebitda margin, which is calculated on the basis of gross bookings, a term encompassing the dollar value of transactions for which riders are charged.

Admittedly, people talk in basis points and percentage points to avoid other types of confusion that pure percentages might cause. Projecting margin growth of 0.5% could be ambiguous - should investors add 0.5 to the 1.6 [percent] margin figure for 2023, or multiply 1.6 by 0.5%?

But Lyft could have saved investors - and themselves - a huge headache by simply doing the desired math for Wall Street and spelling out the actual margin target for 2024, without dealing in basis points and growth rates. Doing that would have made it easier for the company to spot a number that didn't look quite right, and the whole fiasco might have been averted.

Lyft executives were more than capable of doing that math, since Brewer shared the 2.1% target on the earnings call. Why not simplify matters for investors early on and give that number in the release as well?

I totally agree and more.

This Lyft press release also broke many of the SEC's rules about non-GAAP metric presentation.  

The headline of the earnings press release is all about "Bookings", a non-GAAP metric, with a dash of puffery in its claim of “all-time highs”.

The ratio that caused all the fuss, a guidance figure for operating margin was a triple non-GAAP number: (1) Adjusted (2) EBITDA based on (3) Bookings.  There is no comparable GAAP guidance.

Three out of four figures presented as results for the 4th Quarter and the full year are non-GAAP metrics, with the non-GAAP "Bookings" metric leading.

Another good take came from Bloomberg again, this time Amanda Iacone, Nicola M. White, and Matthew Bultman on February 15:

Companies put in place processes known as disclosure controls to ensure they provide investors with reliable information and don’t hide bad news.

Some corporate policies require a management-level committee to review certain documents. They may also require the audit committee or audit committee chair to review documents, like earnings releases, before they are made public.

Companies may have additional controls for non-GAAP figures to ensure they don’t mislead investors. Companies also have to correctly show how the numbers reconcile, or relate back, to US accounting standards.

Despite all those layers of review, mistakes as simple as typing in an extra zero can happen. And sometimes that carefully crafted communication can miss its mark.

“Those people might have thought 500 basis points was the right number,” said Kurt Gee, associate accounting professor at Ohio State University. “You might surmise that the way it was written, in terms of basis points, also made it hard for those people to understand that there was a mistake.”

Bloomberg's Iacone, et al commented on the legal and regulatory ramifications and mostly said probably nothing is going to happen. Bloomberg maestro Matt Levine pooh-poohs the possibility, too.

Except for insider trading. I am sure someone(s) are definitely looking at that.

Maybe Lyft should reevaluate its reserves for legal contingencies.

My frequent collaborator Olga Usvyatsky and I will be saying more on our newsletter Deep Quarry.  Stay tuned.

Bloomberg's Iacone, et al also looked at whether the auditor should have caught the mistake:

No single person is responsible for the accuracy of corporate earnings releases. It takes a team to compile and review the details from forecasts to quotes, including: finance staff, investor relations, in-house or possibly outside counsel, chief executives, various business units and the board’s audit committee.

Outside auditors play a small role if any. External accountants typically review corporate press releases and other statements to check that the messaging aligns with the company’s audited financial statements. But they don’t audit forecasted information or metrics that deviate from US generally accepted accounting principles, known as non-GAAP data.

I had a comment on that on LinkedIn: