Non-GAAP measures are nothing new. They've been around since the 1990s, yet they've become a hot topic recently with nearly 90% percent of the S&P 500 now using at least one type of non-GAAP measure. As the difference between GAAP and non-GAAP measures continues to widen, the SEC has turned its attention to the issue.
The SEC Issues Guidance on Non-GAAPIn this episode, Terry Ward, Partner with PwC's Governance Insights Center, walks us through this hot-button board topic. The issue, Ward explains, is a loss of investor confidence in reported company financial information, which has resulted in the SEC's issuance of interpretive guidelines. Are companies painting too rosy a financial picture in using non-GAAP measures?
What's the Audit Committee's Role in Non-GAAP Measures?Ward encourages audit committees to take a deep dive into non-GAAP measures and examine why they're there in the first place. PwC's latest resource, To GAAP or Non-GAAP: The SEC is Watching, provides a list of questions that audit committees can ask of management in order to take a deep dive:
- Why is this non-GAAP measure being provided? Is it useful to investors? Have they provided feedback?
- What purpose does the measure serve internally?
- Is the company's process to calculate the non-GAAP measure robust enough?
- Is there a judgement involved in the measures? Does management have a bias to adjust those measures in order to meet earnings expectations?