SEC Still Probing Alternative Performance Measures Use: Chairman

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By Steve Burkholder

The head of the Securities and Exchange Commission said companies have gotten the SEC’s message that their performance reports shouldn’t stray from audited financial information using generally accepted accounting principles.

SEC Chairman Jay Clayton on Oct. 26 also signaled that the commission will remain vigilant on the use of non-GAAP earnings measures and other “key performance indicators” that, while valuable to investors, can also misrepresent financial outcomes.

“My sense is that companies get the message,” Clayton said at a conference on accountants’ liability, referring to SEC staff efforts in early 2016 to curb the use of tailored metrics that aren’t anchored sufficiently in GAAP.

“Don’t fool around with them and don’t give us different ones from the ones that you use,” he said, repeating the essential message on non-GAAPmetrics, which many companies feature prominently in quarterly earnings reports.

Still, ‘Great Value’ in Non-GAAP

Clayton also said at the American Law Institute conference that non-GAAP metrics have “great value.” They provide insights into how managers run companies and offer forward-looking as well as backward-looking information, he said.

He warned against changing performance gauges. Companies “can’t use the fact that they’re valuable to keep changing them,” he said.

Investors also must be aware that the SEC is scrutinizing use of non-GAAP reporting, Clayton said. Performance measures must depict for investors “how people run the business” and “how management looks forward,” he said.

“They’re important for investors to get,” he said of the measures. “And it’s important for investors to have a tie back to the GAAP financial statements.”

SEC Staff Saw Success

Top SEC staff accountants said in May 2016 the commission was cracking down on the unaudited non-GAAP financial reporting practices. The regulators feared investors can be misled by them.

SEC officials targeted what they saw as an increase in use of non-GAAP measures, such as those from tailored accounting principles, and “cherry-picking” of good news items over bad.

Mark Kronforst, chief accountant of the SEC’s Division of Corporation Finance, said in May of this year that the commission’s efforts in the crackdown had succeeded. Wesley Bricker, the agency’s chief accountant, said he concurred.

Kronforst credited companies for heeding the SEC’s message on non-GAAP measures. He said a key part of the success of the commission’s campaign was to ensure that “companies took the initiative to make changes on their own.”

To contact the reporter on this story: Steve Burkholder in Washington at sburkholder@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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