“Merrill Lynch & Co. is aiming to put more research into its research reports,” writes Karin Talley in today’s Wall Street Journal.

“In a move that could lead to closer scrutiny of corporate earnings by Wall Street, Merrill Lynch is telling its stock analysts to use a variety of ways to gauge the state of companies’ financial performance, rather than using just the pro-forma numbers provided by firms.”

“The growing use of pro-forma numbers, which are calculated by many companies as if certain key items such as expenses don’t exist, has been criticized for making corporate results look better than they are. Wall Street analysts have abetted the practice — and damaged their own credibility — by accepting the pro-forma numbers without scrutinizing them closely enough, critics say.”

“Companies have a host of names for these pro-forma earnings — ‘cash earnings’ or ‘operating earnings’ for example — and there is no uniform standard by which to understand them, causing much confusion among investors.”

“Specifically, Merrill is adopting in its stock research ‘the use of broad measures beyond pro-forma earnings to evaluate a company’s quality of earnings with the objective of establishing an enhanced standard of accountability and transparency for our clients,’ according to an internal memo.”

“The measures take as their foundation tougher principles than companies themselves often use when reporting financial results to the public and are meant to provide a more comprehensive picture of company finances, said Merrill Lynch’s chief of equity research, Deepak Raj, who is developing the standards.”

“It remains to be seen whether Merrill’s approach, if broadly adopted, will improve the quality of research of Wall Street analysts, who have been derided for maintaining ‘buy’ recommendations on most stocks even as they plunged when the market bubble burst.”

“Still, while many firms on Wall Street say their analysts look beyond pro-forma earnings, Merrill may well be the first big investment firm to adopt formal standards, industry experts said. ‘I don’t know of anyone else who has gone that far,’ said Nina McKenna, a former chief regional counsel with the enforcement division of the National Association of Securities Dealers and now in private practice at the law firm of Sonnenschein Nath & Rosenthal, Kansas City, Kan.”