Yesterday, in a case of investment fraud, the S.E.C. formally charged two former accounting executives with falsifying the financial performance of a real estate investment trust. It is alleged that the former executives of VEREIT Inc., then known as American Realty Capital Properties (ARCP), purposefully and knowingly overstated quarterly earnings by inflating figures in a key accounting metric used by investors and analysts to assess the financial performance.
Former Chief-financial-officer, Brian S. Block and former Chief-accounting-officer, Lisa P. McAlister attempted to defraud investors by manipulating how the company’s adjusted funds from operations (AFFO) were calculated. AFFOs are used by accounting analysts as a non-GAAP measure to further asses the investment value of a company. They are used by companies in addition to mandatory generally accepted accounting principles (GAAP) enforced by the S.E.C. While these non-GAAP methods usually serve to provide a more detailed assessment of a company’s financial performance, fraudulent claims mislead investors as to the viability of their investments.
In this case, the AFFO was used as the primary company measure for providing earnings guidance to its investors. Though the company had, in fact, fallen short of its projected earnings for the quarter, the former executives concocted the investment fraud scheme to conceal those figures before issuing their earnings statement. Investment fraud like this not only jeopardizes investors’ capital, but also severely damages a company’s credibility and good market standing.