Non-GAAP is not a non-issue at the SEC

This week, two SEC officials took to the pulpit at the American Institute of Certified Public Accountants Conference in Washington, DC – both discussing the mis-use of Non-GAAP reporting.


Michael Maloney, chief accountant of the SEC’s enforcement division is looking into violations of rules governing non-GAAP metrics. “It is a focus in within the division, we are looking closely at it. If we think there’s enough there to open an investigation, we will. It’s going to be the fact and circumstances that we will look at, and that will lead to the enforcement action.”

Maloney’s talk was a clear warning to issuers that use non-GAAP metrics in their financial reporting will come under greater scrutiny. The SEC offered new compliance guidelines back in May.

Another chief accountant, Wesley R. Bricker, was less Draconian is his presentation to audit committee members – identifying them as the “critical gatekeepers” to certify credible, reliable financial reporting and compliance with the C&DIs.  He reminded the audience that board members sitting on the audit committees should not underestimate the importance of their role overseeing the external auditor as these third-party auditors are 100% accountable to the audit committee…not to management.

Bricker also suggested auditors are critical for shareholder protection and asked board members to use these fours questions as a directional “do-the-right-thing” guide:

  • If you as the auditor were in management’s shoes and solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently?
  • If you as the auditor were in an investor’s shoes, would you believe that you have received the information essential to understanding the company’s financial position and performance?
  • If the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO’s shoes?
  • Are there any recommendations that you as the auditor have made and management has not followed?

Lastly, he emphasized that good reporting practices place a premium on audit committee member understanding of the company’s non-GAAP policies, procedures, and controls and that audit committee members should seek to understand management’s judgments in the design, preparation and presentation of non-GAAP measures and how those measures might differ from approaches followed by other companies.

This comparison is another area where investor relations can bring their sector expertise into the boardroom – as we discussed earlier this week here.

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