Non-GAAP Financial Measures – Agenda Item for Upcoming Audit Committee Meetings
On June 27, 2016, SEC Chair Mary Jo White delivered a speech, which focused, in part, on non-GAAP financial measures, which have become the new old “hot button” issue for the SEC. Chair White strongly urged companies to carefully consider the SEC’s new Compliance & Disclosure Interpretations (“C&DIs”) that were issued in May 2016 and to “revisit their approach to non-GAAP disclosures.” In addition, Chair White emphasized that appropriate controls should be considered and that audit committees should carefully oversee their company’s use of non-GAAP financial measures and disclosures.
The SEC’s mission with respect to non-GAAP financial measures has been the same since its adoption of non-GAAP rules in 2003 — “to eliminate the manipulative or misleading use of non-GAAP financial measures and, at the same time, enhance the comparability associated with the use of that information.” Although the SEC recognizes that “investors want non-GAAP information,” as Chair White mentioned in her speech, the concern is that instead of supplementing the GAAP information, non-GAAP financial measures have “become the key message to investors, crowding out and effectively supplanting the GAAP presentation.” To make her message crystal clear, Chair White also stated in her speech that the SEC is “watching this space very closely and [is] poised to act through the filing review process, enforcement and further rulemaking if necessary to achieve the optimal disclosures for investors and the markets.”
If a company uses non-GAAP financial measures, then the use of such measures and disclosures in the company’s SEC filings, earnings press releases, earnings calls and other presentations should be an agenda item for upcoming audit committee meetings. On June 28, 2016, the Center for Audit Quality issued a new publication, Questions on Non-GAAP Measures: A Tool for Audit Committees, which is designed to facilitate the conversation between audit committees and management about non-GAAP financial measures. Questions included in this publication focus on transparency, consistency, and comparability of non-GAAP financial measures. The publication also includes a few procedural questions that are important to assess whether appropriate controls exist with respect to the use and disclosure of non-GAAP financial measures.