While Generally Accepted Accounting Principles (GAAP) provide a framework for consistency and comparability across U.S. financial statements, non-GAAP financial measures can be a valuable tool for companies who are trying to paint a broader financial picture for their investors. Often requested by investment analysts, non-GAAP measures have become an integral part of the U.S. financial reporting system, although not without debate and controversy.
The inherent challenge surrounding non-GAAP measures is the lack of consistency-both in calculation and reporting-from one company to the next. This can become incidentally deceptive if the end-user doesn't know whether the performance being reported by the press is GAAP or non-GAAP. In turn, the SEC has devoted significant attention to non-GAAP measures in recent years and has issued guidance specific to the presentation of these metrics. Although companies are improving their non-GAAP reporting, the SEC reminds audit committees that there are strides still to be made.
As an output from the roundtable discussions, the CAQ has created a tool to guide audit committees in their oversight and assessment of non-GAAP measures. Titled Non-GAAP Measures: A Roadmap for Audit Committees, the guide summarizes insights across the various CAQ roundtables and provides boards and audit committee members with a actionable framework for addressing the following questions:
The Challenge for Audit Committees
In 2017, the Center for Audit Quality (CAQ) hosted three roundtable discussions to understand the specific challenges that non-GAAP measures present for audit committees, among other stakeholders in the reporting process. Despite the difficulties that non-GAAP measures create, the 50+ roundtable participants unanimously agreed that the benefits of non-GAAP metrics far exceeded the challenges; they also emphasized the critical role of the audit committee in assessing these metrics for fairness and consistency, particularly when non-GAAP measures serve as an input for executive compensation. [blockquote source="Jim Hunt, Audit Committee Chair, Brown & Brown"]The audit committee's [role in] asking questions about the preparation of non-GAAP measures is an important area. It begins with, 'How are we using [non-GAAP measures] to better explain to our shareholders, first and foremost, how management thinks about the business?'...Particularly with complex, multi-segment businesses and global businesses, there are going to be times and instances where [non-GAAP measures] do enhance a user's understanding.[/blockquote]As an output from the roundtable discussions, the CAQ has created a tool to guide audit committees in their oversight and assessment of non-GAAP measures. Titled Non-GAAP Measures: A Roadmap for Audit Committees, the guide summarizes insights across the various CAQ roundtables and provides boards and audit committee members with a actionable framework for addressing the following questions:
- What are the key perspectives or steps to consider when assessing management's use of non-GAAP measures?
- What's the role of the external auditor? How can they be used as a resource?
- What are the current leading practices for non-GAAP measures across industries?
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