Non-GAAP measures - The role of the audit committee

December 31, 2024

More than 20 years after the dot-com boom sparked a proliferation of non-GAAP financial measures, they continue to expand and remain an important part of the financial reporting process. The measures can play an important role in showing a view of the company’s financial or operational results to supplement what is captured in the financial statements. Non-GAAP measures adjust a company’s operating performance, financial position, or cash flows by excluding or including amounts from the most directly comparable GAAP measure. They can help management tell the company’s story to users of the financial statements that gives a view into the company “through the eyes of management.”

Common non-GAAP financial measures

Operating income that excludes one or more expense items
Adjusted revenue, adjusted earnings, and adjusted earnings per share
EBIT and EBITDA, and adjusted EBIT and EBITDA
Core earnings
Free cash flow
Funds from operations

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Where does the audit committee fit in?

Here are some questions audit committees may want to ask management in fulfilling their oversight responsibilities:

What is the purpose of the non-GAAP measure?
Which competitors and peer companies use non-GAAP measures and how do they compare to those used by the company?
What questions or feedback has management received from investors or analysts on a specific non-GAAP measure(s)?

What procedures are in place to ensure the calculations are accurate and consistent with those of prior periods?
Is the process covered by management’s internal control over financial reporting or other disclosure controls? If not, why not?
Has the company considered having internal audit perform a review of the internal controls over the derivation of non-GAAP measures to determine whether the controls are effective?

What is the company’s policy on what will give rise to a non-GAAP adjustment? How is materiality considered in this policy?
What are the areas of judgment?
How do non-GAAP measures impact management compensation?
How does management’s disclosure committee focus on non-GAAP measures and consider their appropriateness?

Are GAAP measures presented with equal or greater prominence?
Is the disclosure descriptive and transparent or “boilerplate”?
Has the company received an SEC comment letter focused on any non-GAAP matters?

Can the measures potentially be considered misleading?
Are prohibited measures excluded?
Are adjustments to arrive at a non-GAAP measure labeled as non-recurring, infrequent, or unusual expected to recur in the next two years?

Is additional disclosure necessary to ensure the metric is not materially misleading, including further information on any estimates or assumptions underlying the metric or its calculation?
Are the reasons for any changes in the methodology of material KPIs appropriately disclosed?
What disclosure controls and procedures are in place to ensure the completeness and accuracy of KPIs?

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 2018. Since those C&DIs were released, the SEC has reiterated their views on non-GAAP.

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.

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.

Non-GAAP measures: The role of the audit committee

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Ray Garcia

Partner & Leader, Governance Insights Center, PwC US

Gregory Johnson

Director, Governance Insights Center, PwC US

Stephen G. Parker

Partner, Governance Insights Center, PwC US

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Non-GAAP measures - The role of the audit committee

Common non-GAAP financial measures

Where does the audit committee fit in?

Non-GAAP measures: The role of the audit committee

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Non-GAAP measures - The role of the audit committee

Common non-GAAP financial measures

Where does the audit committee fit in?

Non-GAAP measures: The role of the audit committee

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