MarketWatch is not alone in criticizing wireless operator T-Mobile US. Inc. for its accounting.

An investor group sent a formal letter of complaint to the Securities and Exchange Commission on Wednesday, asking the regulator to conduct a probe of the company’s accounting practices.

CtW Investment Group works with pension funds that are sponsored by unions affiliated with a federation known as Change to Win, and focuses on shareholder activism around corporate governance. CtW said the funds it works with own about 600,000 shares of T-Mobile TMUS, -3.01% , or roughly 0.1% of the 832 million diluted shares outstanding as of Sept. 30. The funds also own about 500,000 shares of T-Mobile parent, Deutsche Telekom AG DTE, -0.48% DTEA, -0.69% .

“ “TMUS appears to have adopted a significant change to its accounting estimates during these four quarters, without providing shareholders with a clear or convincing explanation for so doing.” ” — Dieter Waizenegger, executive director, CtW Investment Group

The group highlights two issues in its complaint. It maintains that T-Mobile overstated GAAP earnings – those prepared under Generally Accepted Accounting Principles – by about $122 million in the period stretching from the fourth quarter of 2014 through the first three quarters of 2015. It did so in the accounting estimates used to recognize revenue from sales of its Equipment Installment Plans (EIPs), said the letter. That may have helped boost the stock price and in turn, executive compensation, according to CtW.

T-Mobile’s stock soared 38% during the four quarters in question, while the iShares U.S. Telecommunications exchange-traded fund IYZ, -2.52% dropped 9.8% and the S&P 500 index SPX, -2.37% slipped 2.6% over the same time.

CtW further criticized the company for its misleading use of non-GAAP measures, which are given greater prominence over GAAP numbers in its earnings releases, contrary to updated SEC guidelines published in May. CtW maintains those numbers can confuse or mislead investors about the company’s true profit. The latter was a point made by MarketWatch’s Francine McKenna after the company reported third-quarter earnings in October.

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“It could give shareholders a misleading impression of profitability, growth in profit and changes over time,” said Richard Clayton, research director at CtW. “That’s information that an investor is going to be incorporating into any investment decision, whether buying, selling or holding the stock, or even voting at a shareholder meeting. It’s important that shareholders get information in an accurate and transparent way.”

T-Mobile has not responded to repeated requests for comment. Deutsche Telekom responded by referring MarketWatch to T-Mobile in which it owns a 65% stake. It noted that T-Mobile’s accounts are audited and “have been confirmed without any objections.” PricewaterhouseCoopers was the auditor on T-Mobile’s 2015 annual report.

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Measuring credit risk

The EIP, a product introduced in 2013 by then new CEO John Legere, was typically a two-year contract that offered customers the chance to purchase a handset from T-Mobile and pay in installments. It was part of Legere’s “no strings attached” branding campaign, which aimed to expand the company’s customer base. Customers were required to pay off any remaining balance on the contract if they switched to a new carrier or canceled the service.

CtW’s research found that many customers likely failed to understand the terms of the contract, and based on the number of complaints made to the Federal Trade Commission and Better Business Bureau, many were likely unable to make their payments. The company itself acknowledged that credit risk was rising in its customer pool in disclosures showing the number of subprime customers was growing faster than its prime customer base.

Yet, the company repeatedly lowered the allowances for credit losses on EIPs, even as the subprime portion of its receivables continued to grow.

T-Mobile equipment installment plans (EIP) receivables and allowances for credit losses Quarter Total gross EIP receivables (millions) Allowance for credit losses (millions) Ratio of allowances to receivables Q1 2014 $3,487 $97 2.8% Q2 2014 $4.029 $126 3.1% Q3 2014 $4,403 $131 3.0% Q4 2014 $5,138 $116 2.3% Q1 2015 $5,275 $106 2.0% Q2 2015 $5,555 $112 2.0% Q3 2015 $5,193 $137 2.6% Q4 2015 $3,558 $148 4.2% CtW Investment Group, Securities and Exchange Commission

“While we are not privy to the detailed customer information available to TMUS, it should be clear from our letter’s review of publicly available data relevant to the credit quality of its EIP receivables that if anything the allowance for credit losses should have been higher over the course of 2015 than it had been in 2014, and not noticeably lower,” Dieter Waizenegger, executive director of CtW, wrote in the letter to the SEC.

“TMUS appears to have adopted a significant change to its accounting estimates during these four quarters, without providing shareholders with a clear or convincing explanation for so doing.”

MarketWatch made a comparison with Sprint Corp.’s US:S allowances for credit losses as a percent of gross installment receivables in the same period. An analysis of quarterly filings found Sprint’s allowance was a much higher 9.4% for the third calendar quarter of 2014, then rose to an average of 11.8% over the next four quarters, reaching a high of 13.9% during the June quarter. Allowances then declined to 11.0% for the December 2015 quarter.

Mind the GAAP

CtW’s criticism of T-Mobile’s use of non-GAAP numbers includes the complaint that it does not explain how those numbers are reconciled with GAAP numbers, as required under SEC rules. The company provides non-GAAP measures, including adjusted EBITDA, in headlines without providing a net income measure to which it should be reconciled. It has multiple presentations of adjusted EBITDA and their growth rates, but just one of net income and earnings per share, which are provided without growth rates, according to CtW.

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The company does not provide investors with the information they need to compare adjusted EBITDA and adjusted free cash flow to its own previously-reported non-GAAP measures, to current or previous GAAP measures, “or even to the non-GAAP measures used by other telecommunications firms,” said the letter.

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Its reporting of free cash flow and adjusted free cash flow also suffer from insufficient disclosures that make it difficult for investors to reconcile the two, said the letter. While both are displayed prominently in earnings releases, they are defined in ways that are not consistent with common usage. The company’s free cash flow, typically defined as operating cash flow minus capital expenditures, excludes the purchase of spectrum licenses, which is a large, strategically critical and recurring cost, said the letter.

T-Mobile has spent more than $4.6 billion on spectrum in the past three fiscal years, out of a total of $13 billion in reported capital spending, said the letter.

The parent trap

CtW sent a letter to Deutsche Telekom AG in May addressed to Chief Executive Timotheus Hoettges, highlighting T-Mobile’s EIP issue. That letter asked Hoettges to review the investment firm’s findings on T-Mobile’s accounting for EIP receivables and take appropriate action.

“We have not received any response to our letter, and have decided to raise our concerns with you in the hope that the SEC will agree that our analysis merits a further investigation,” wrote Waizenegger.

CtW is also asking the SEC to investigate whether T-Mobile’s accounting practices led its parent to overstate revenue and net income. In addition to its stake in the company, Deutsche Telekom has five out of 11 board seats and Hoettges serves as chairman. CtW estimates that the parent’s operating earnings in 2016 were boosted about 2% by T-Mobile’s aggressive revenue recognition.

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“We believe that TMUS has persisted in making incomplete and inadequate disclosures relevant to its use of non-GAAP performance measures and their prominent placement in its earnings releases,” wrote Waizenegger.

T-Mobile US shares closed up 0.2% Wednesday, but have gained 39% in the year so far. The S&P 500 has gained 7.9% in the same time period, while the Dow Jones Industrial Average DJIA, -1.92% is up 9.5%.

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