The SEC continues to scrutinize the use of non-GAAP financial measures. Audit committees need to be informed and know what questions to ask management.
Why are non-GAAP measures relevant?
More companies now use non-GAAP measures, and the majority of the time, their non-GAAP results are better than those reported under GAAP. The last time the SEC updated its interpretive guidance by releasing additional Compliance & Disclosure Interpretations (C&DIs) was in May 2016. Since those C&DIs were released, the SEC has reiterated their views on non-GAAP.
What are the rules around non-GAAP information?
The disclosure requirements vary based on the applicable regulation. Regardless of the source, all of the governing regulations share an overarching principle that non-GAAP information cannot be misleading. Companies may also be subject to express prohibitions depending on which regulation governs a particular non-GAAP disclosure.
Can the non-GAAP adjustments be trusted?
The use of GAAP provides uniformity in how companies report their financial performance. But most S&P 500 companies choose to report non-GAAP metrics in addition to GAAP measures. If done appropriately, non-GAAP measures can provide insights into a company’s business, past performance, and its potential prospects.
Where does the audit committee fit in?
Acting as a bridge between management and stakeholders, the audit committee is well positioned to exercise healthy oversight by asking the right questions. The audit committee has a significant role in overseeing the presentation of non-GAAP measures.