Academic journal article Journal of Accountancy

Socially Awkward: Social Media Companies' Nonfinancial Metrics Can Send a Mixed Message

Academic journal article Journal of Accountancy

Socially Awkward: Social Media Companies' Nonfinancial Metrics Can Send a Mixed Message

Article excerpt

EXECUTIVE SUMMARY

* User data compiled by social media companies is not audited, and there is little consistency in the way companies determine these nonfinancial metrics (such as Facebook "likes").

* The use of nontraditional, nonfinancial metrics as performance indicators is a potential concern for regulators and auditors responsible for ensuring the accuracy of financial reporting.

* Social media companies may view nonfinancial metrics as performance indicators, but there does not appear to be a clear link between such metrics and profitability.

* The SEC provided guidance that companies should identify and discuss key performance indicators, including nonfinancial ones that would be material to investors. The guidance also states that when no common method exists for calculating a specific metric, the company should provide an explanation of its calculation.

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In November 2013, SEC Chair Mary Jo White questioned whether investors could project a company's future potential from "unique financial or operational metrics" that may not be an indicator of future profitability. These comments followed Twitter's initial public offering (IPO), which raised $1.82 billion through the planned sale of 70 million shares at $26 per share. Twitter's IPO was, at the time, the second largest in history for a U.S. internet company despite Twitter's disclosure in its first public financial statement that it lost $79.4 million in 2012 and had not been profitable for the last three years.

Twitter and other social media and mobile-based companies have particular ways 'of capturing their performance levels, whether it be tweets, Facebook "likes," Pandora listener hours, visitors, or other user-based measures. The user data provided in the company's management discussion and analysis (MD&A) and elsewhere is not audited, nor is there any consistency in the way companies determine these nonfinancial metrics. One social media company may define its users in a different way than another does, hampering the comparability of user data across companies and calling into question the accuracy of the definition and calculation of these nonfinancial metrics.

Social media companies appear to have fast-growing market capitalizations in common. As of March 31, Twitter boasted a $27.5 billion market capitalization. Facebook's market capitalization was $154.5 billion, and LinkedIn had a market capitalization of $23 billion. Facebook's market cap grew 154% from the quarter ended March 31, 2013, through the quarter ended March 31 of this year. In comparison, Microsoft's market capitalization increased 41%, and General Motors' increased 45% in the same period.

The actual financial performance of the social media companies, however, would seem to be at odds with such numbers. Twitter is not isolated in its history of reporting losses. It would seem investors are motivated, at least in part, by nonfinancial metrics. Per their respective Forms 10-Q for the quarter ended March 31, Twitter reported approximately 255 million monthly "active users," Facebook reported 1.3 billion monthly "active users," and LinkedIn reported more than 296 million "registered members."

The increasing use of nontraditional, nonfinancial metrics as performance indicators is a growing concern among regulators and auditors responsible for ensuring the accuracy of financial reporting. While social media companies may view nonfinancial metrics as performance indicators, there does not appear to be a connection between such metrics and profitability, as evidenced in the scatter plots of financial performance vs. nonfinancial metrics (see Exhibit 3). This potentially could mislead investors. As the business world continues to depart from traditional brick-and-mortar companies, the auditing profession may need to reevaluate its current standards with respect to nonfinancial metrics. …

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