How audit committees can evaluate non-GAAP measures

An increase in company reporting of non-GAAP measures outside the audited financial statements has generated significant attention from regulators in recent years.

The SEC staff in May updated the compliance and disclosure interpretations on its regulations specific to the presentation of non-GAAP measures in SEC filings and other company communications to investors.

SEC Chair Mary Jo White said in a June speech that reporting of non-GAAP measures can provide a clearer picture of a company’s results. But she cautioned that the SEC’s rules require that the presentation of non-GAAP measures not be misleading and that they be reconciled to the appropriate GAAP measure.

“I generally think it is a good idea to provide companies with this flexibility, and we do hear that investors want non-GAAP information,” White said in a videoconference address to the International Corporate Governance Network Annual Conference. “But recently I have had significant concerns about companies taking this flexibility too far and beyond what is intended and allowed by our rules.”

A new publication by the Center for Audit Quality (CAQ), Questions on Non-GAAP Measures: A Tool for Audit Committees, aims to address those issues. It is available at the CAQ’s website or directly at thecaq.org.

The guide is intended to help audit committees understand:

• How management is following SEC regulations.
• Management’s purpose in presenting a non-GAAP measure.
• Why a non-GAAP measure is being used and whether it is reasonable and consistent.

The publication provides audit committees with questions to ask of management related to three core categories: transparency, consistency, and comparability. The tool also reviews current regulations governing non-GAAP information as well as the auditor’s role in this area.

The CAQ is affiliated with the AICPA.