Question

Many companies publicly describe their performance using terms such as “EBITDA” or “earnings purged of various expenses” because they believe these terms more effectively reflect their companies’ perfor-mance than GAAP-defined terms such as net income. What ethical issues might arise from the use of such terms and what challenges does their use present for the governance of the company by stockhold-ers and directors?

Answer 1

Answer)

Many of the bankers now-a-days interested in EBITDA as it is the operating cash flow without any non cash expenses like depreciation and amortization but it can be misused also.Not with the bankers but when it is presented to shareholders or general public who are interested in investing in that company it can be manipulating as it was not their actual profit that will be distributed which would raise an ethical issue as the GAAP provides transperacy and by use of EBITDA it protrays as the company that the actual company is not.

Moreover the shareholders and directors cannot concludes the important issues like working capital requirements and real value of assets using EBITDA as the value of assets remains constant as EBITDA ignores amortization and depreciation and working capital requirements cannot be ascertained as by removing depreciation and amortization from EBITDA may result in low profit or even loss.