For March 7, our forensic accounting needle in a haystack comes from an investment bank with a non-recurring tax benefit.

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Analyst Peter Apockotos found an unusual item in Goldman Sachs’ (GS) 2018 10-K.

On page 46, GS discloses that it recorded a $487 million (5% of GAAP net income) tax benefit related to the Tax Cuts and Jobs Act in 2018. This benefit reverses a small portion of the $4.4 billion tax expense GS recorded due to the tax law in 2017.

After the tax law was passed, we wrote that many companies would face a significant one-time impact (both positive and negative) on their 2017 earnings. However, because the tax law passed so late in the year, most companies did not have time to fully account for its impact and recorded a “provisional” benefit/expense. Now, more than a year later, the tax law is still distorting the income statement for many companies.

GS grew GAAP net income by 168% in 2018 in large part due to the new tax law understating 2017 profits and overstating 2018 profits. After adjusting for the tax impact and other noise in reported earnings, we show that net operating profit after tax (NOPAT) grew by just 16%. Accordingly, you can see how accounting for unusual items in the footnotes is crucial to understanding the true profitability of a company.

The Power of the Robo-Analyst

We analyzed 29 10-K filings yesterday, from which our Robo-Analyst[1] technology collected 2,178 data points. Our analyst team used this data to make 491 forensic accounting adjustments with a dollar value of $137 billion. The adjustments were applied as follows:

  • 223 income statement adjustments with a total value of $17 billion
  • 189 balance sheet adjustments with a total value of $67 billion
  • 79 valuation adjustments with a total value of $53 billion

We believe this research is necessary to fulfill the Fiduciary Duty of Care. Ernst & Young’s white paper, “Getting ROIC Right”, demonstrates how these adjustments contribute to meaningfully superior models and metrics.

This article originally published on March 7, 2019.

Disclosure: David Trainer, Peter Apockotos, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.

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[1] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

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