How audit committees can evaluate non-GAAP measures

By Ken Tysiac

Evaluating a company’s use of non-GAAP measures in financial statements can be a challenge for audit committee members.

Used correctly, non-GAAP measures can provide companies with an opportunity to tell their story more fully in the financial statements. If misused, however, non-GAAP measures can present a distorted picture that’s more favorable than the company’s true results would indicate.

The possibility that some companies were presenting a too-rosy view is one reason the SEC recently made non-GAAP measures an area of focus, updating its Compliance & Disclosure Interpretations in the area of non-GAAP reporting in 2016 and 2017.

By December 2016, SEC Chief Accountant Wesley Bricker, CPA, said that substantial progress had been made in addressing problematic practices, but he said more progress needed to be made.

A new Center for Audit Quality tool published Friday is designed to assist audit committees in their important oversight role related to non-GAAP measures. (The CAQ is affiliated with the AICPA.) The tool reports that a non-GAAP measure generally can be useful when it is calculated and presented consistently, transparently disclosed, and comparable to measures disclosed by other companies.

Audit committee members can engage with management, investors, counsel, and external auditors on the issue of non-GAAP measures, according to the tool. Management can be asked:

  • Whether it has an internal policy for determining how non-GAAP measures are generated, calculated, and presented.
  • How the company changes the non-GAAP measures it presents, and why it would or would not make changes.
  • To compare or benchmark its non-GAAP measures to those of its peers.
  • What disclosure controls and procedures are in place.

Meanwhile, the tool says it can be useful to ask external auditors what their responsibilities are for non-GAAP measures; for perspectives on how the company’s non-GAAP measures compare with those of other companies; and what their views are on the company’s non-GAAP measures.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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