If you have been reading financial newspapers recently, you are bound to have come across articles about the Securities and Exchange Commission’s (SEC) renewed focus on the use of non-GAAP financial measures in public disclosures. The Wall Street Journal recently reported that only 5.7 percent of companies in the S&P 500 index reported 2015 financials using solely GAAP measures. According to research firm Audit Analytics, this figure was 25 percent in 2006. The SEC’s concern with the prevalent presentation and misleading use of non-GAAP financial measures was summed up by SEC Chairman Mary Jo White at a Senate hearing where she was quoted saying: “In too many cases, the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation.” As promised, the SEC has continued to scrutinize non-GAAP disclosures and, in May 2016, issued formal guidance on this topic.
The Existing Rules
In the wake of the Enron scandal and the dot-com crash in the early 2000s, the Sarbanes Oxley Act of 2002 directed the SEC to regulate the use of non-GAAP financial measures. In 2003, the SEC adopted Regulation G and Item 10(e) of Regulation S-K, which govern the public disclosure of non-GAAP financial measures.
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