Can public company auditors help make the case for the use of non-GAAP financial measures?
The Center for Audit Quality (CAQ) thinks so, and its recent report, Non-GAAP Financial Measures: Continuing the Conversation, explores the notion that such measures can provide valuable information about companies.
That is, when that information is presented appropriately – which is what the discourse is all about.
The concern is that, unlike the uniformity and common standards of GAAP, non-GAAP measures could confuse or mislead investors. And that gets regulators riled up.
“The CAQ believes non-GAAP financial measures that are transparent, calculated consistently, and comparable to other companies can help companies provide users with useful information,” the report states. “In today’s increasingly complex markets, a variety of entities can have differing needs and uses for the information companies present about their performance. This variety poses a challenge for companies seeking to provide information that meets all users’ needs.”
And that’s where public company auditors come in, says CAQ Executive Director Cindy Fornelli. They’re in “a unique position to foster a dialogue about non-GAAP financial measures and what might be done to enhance public confidence in them,” she said.
After all, non-GAAP financial measures are often included in other areas of a company’s annual and quarterly filings that contain financial statements, the report states. And the professional standards followed by auditors indicate that they should read other information in documents that contain financial statements, such as annual reports, and “consider whether the other information or the manner of its presentation is materially inconsistent with information appearing in the financial statements or a material misstatement of fact,” the report states.
Including this other information in corporate filings fuels the misperception of auditor involvement in non-GAAP measures, the report states. What’s more, non-GAAP measures are often included in press releases, earnings calls, and other documents that don’t include financial statements. While auditors generally don’t have to review that stuff, they actually often do as part of their risk assessment. And audit committees and managers may use auditors as “a sounding board” in evaluating non-GAAP measures.
What needs to happen, though, is much discussion across “the financial reporting supply chain” regarding non-GAAP measures. The report, in fact, poses a series of 40 questions for consideration, divvied up among managers, investors, investment analysts, securities counselors, audit committees, internal and independent auditors, regulators (US Securities and Exchange Commission), accounting standard-setters (Financial Accounting Standards Board), and academics.
It’s a challenge, is what it is. The questions, and how the “supply chain” answers them, will help determine how to improve the reliability of non-GAAP financial measures. The CAQ will use the questions in roundtables and panels to continue the dialogue.