Filing Season Finds: Friday, March 17

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Our latest forensic accounting red flag is from an industrial bellwether whose balance sheet significantly understates its invested capital.

We pulled this highlight from yesterday’s research of 64 10-K filings, from which our robo-analyst technology collected 8,054 data points. Our analyst team used this data to make 1,318 forensic accounting adjustments with a dollar value of $55 billion. The adjustments were applied as follows:

  • 534 income statement adjustments with a total value of $5 billion
  • 566 balance sheet adjustments with a total value of $25 billion
  • 218 valuation adjustments with a total value of $25 billion

Figure 1: Filing Season Diligence

newconstructs_filingseasondiligencestats_2017-03-17

Sources: New Constructs, LLC and company filings. 

We believe this research is necessary to close the gap between the suitability and fiduciary standard of investment advice services.

Today’s Forensic Accounting Needle In A Haystack Is For Industrial Investors

Analyst Allen L. Jackson found an unusual item yesterday in Alcoa’s (AA) 10-K.

On page 128, Alcoa includes a table detailing its accumulated other comprehensive loss of $3.8 billion. That number represents Alcoa’s accumulated losses on non-shareholder investments such as pensions, foreign currency translation, and hedging activities.

These losses decrease Alcoa’s reported net assets. We want to hold management responsible for all the capital invested in the company, so we add back that $3.8 billion to our calculation of invested capital. Without making this adjustment, AA’s average invested capital would have been $14.4 billion in 2016. With the adjustment, its average invested capital was $17.1 billion.

Few analysts pay close attention to other comprehensive income (loss), but it’s an important item if you want to accurately calculate return on invested capital (ROIC).

This article originally published on March 17, 2017.

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

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