SEC Keeps Heat on Use of Non-GAAP Financial Reporting Gauges

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By Steve Burkholder

Nov. 8 — U.S. securities regulators expect to send soon a substantial batch of cautionary notices on public companies’ presentation of performance measures that lack sufficient grounding in generally accepted accounting principles, a Securities and Exchange Commission staff member said.

The action signals that the SEC is keeping up the heat on earnings reports and formal filings that focus too much on non-GAAP gauges and on the quality of those measures.

Questionable reporting practices have drawn the scrutiny of the agency’s enforcement unit, Bloomberg BNA reported early last month.

“You can expect a flurry over the coming months,” Kyle Moffatt, an associate director in the SEC’s Division of Corporation Finance, said Nov. 7, referring to comment letters to be sent to companies on use of non-GAAP measures.

Eradication Isn’t Goal

“Our goal is not to eradicate non-GAAP measures from all commission filings,” Moffatt said at a New York University forum, echoing recent comments by other SEC officials.

Rather, he said, the SEC action is meant “really just to curb some of the troubling practices that we have noticed that have developed over the last few years.”

Top SEC accountants announced in May a crackdown on improper use of non-GAAP measures in earnings reports—the kind of quarterly reporting that accords too much prominence to unaudited numbers and that might mislead investors.

Over the last two years, the agency has seen a significant decline in compliance with regulations aimed at putting boundaries on what used to be called “pro forma earnings"—financial reporting that typically excludes costs required by GAAP—Moffatt said.

Also in May, the SEC staff issued guidance to remind companies of the proper use of tailored performance measures that are presented as an alternative to reporting anchored in rules of the Financial Accounting Standards Board. Such non-GAAP numbers are supposed to complement GAAP amounts, and not supplant them or be reported more prominently than the audited amounts.

Focus at SEC’s Highest Levels

Non-GAAP financial reporting continues to attrcgt the attention of SEC officials at the highest levels of the agency.

On Oct. 27, SEC Chairman Mary Jo White said, “The topic of non-GAAP measures is one that has and continues to receive a lot of attention at the Commission.

“We have taken a number of steps in response to growing concerns that I and others have had about the appropriateness of certain reporting practices in this area,” White told an investor panel advising audit regulators.

Moffatt targeted as part of his Nov. 7 comments company reporting of “liquidity per share” numbers. The commission’s staff has particularly looked askance at such practices.

The SEC staff deferred comments on the non-GAAP-related guidance it issued in the spring, to wait until they had seen whether public companies had improved their reporting by the time of second-quarter filings, Moffatt said.

The issue of too much prominence accorded to non-GAAP measures is “probably the first thing that companies fixed and addressed in Q2 and also in Q3,” he said, referring to second- and third-quarter reports.

Recent Improvements Noted

Moffatt went on to describe what the SEC staff views as recent improvements in the use of non-GAAP reporting since they issued the guidance in May.

“Some companies have actually stopped calculating results based on earned and unearned revenue,” he said.

“We’re definitely delighted with that result,” said Moffatt, who spoke for himself and not the SEC or its staff.

Some investor advocates at the forum told Bloomberg BNA that they were waiting for the SEC to directly address—in comment letters sent to companies—the quality and nature of non-GAAP measures that companies emphasize.

To contact the reporter on this story: Steve Burkholder in New York at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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