Ethics Update: SEC Investigating Non-GAAP Earnings ManagementBy
The U.S. Securities & Exchange Commission (SEC) has sharpened its focus on the publication of financial measures that are noncompliant with Generally Accepted Accounting Principles (GAAP). (See “The Trouble with Earnings Management” in the December 2015 issue of Strategic Finance and “Is Non-GAAP Reporting Unethical?” in the April 2014 issue.) In a study by FactSet, non-GAAP earnings per share in 2015 averaged 30% higher than the comparable GAAP metric for the Dow Jones Industrial Average companies that did report non-GAAP measures.
Mark Kronforst, the SEC’s corporate finance chief accountant, told The Wall Street Journal, “We are sending a message and we are going to continue talking about it.” He noted that non-GAAP metrics can mislead investors, so the SEC is devoting more attention to them. SEC Chair Mary Jo White hinted that new regulations might be in order, saying, “We have a lot of concern in that space.”