SEC’s Chief Accountant: Issuers Must Address ‘Other Reporting’ Risks

Disclosing supplemental information like key operating metrics and forecasts requires controls and procedures, says the SEC's Wesley Bricker.

When the Securities and Exchange Commission released staff guidance a year ago about reporting non-GAAP financial measures, issuers were advised to review disclosure controls and procedures to ensure they adequately addressed the use and presentation of non-GAAP financial measures.

Now, with issuers largely falling in line with non-GAAP guidance, SEC Chief Accountant Wesley Bricker is trying to draw issuers’ attention to integrity issues in another area of financial reporting: the disclosure of supplemental information like operating metrics and forecasts.

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At the Baruch College Financial Reporting Conference on Thursday, Bricker addressed a number of current accounting issues for registrants and preparers, but he placed particular emphasis on controls and procedures around “other reporting.” In opening remarks, and again on a later panel, he noted that as companies move beyond non-GAAP measures to report other kinds of supplemental information investors are keen on, they have to be wary.

“Similar to non-GAAP financial reporting, key operating metrics and forecasts may also be distorted via bias — for example, painting a potentially misleading picture — error, or fraud, all of which undermine the credibility of the reporting,” Bricker said. “Therefore, it is important that companies proactively and thoughtfully address risks to their reporting.”

How should companies go about it?

“I believe that much of the recent experience with non-GAAP financial metrics also provides lessons for other kinds of reporting by companies,” said Bricker.

“Companies should first understand the other information being reported, including how operating metrics are defined,” he continued. “Companies then should have adequate disclosure controls and procedures in place. In some respects, these other reporting processes may require more steps than some GAAP processes, not fewer.”

Wesley R. Bricker

Wesley R. Bricker Wesley R. Bricker, Other Reporting Risks

The challenge for issuers is that here are no standards for reporting this kind of information.

“A company’s other reporting does not have the benefit of standard-setting due process, which solicits stakeholder views on a representationally faithful manner of reporting a particular event or transaction and the types of disclosures needed by financial statement users,” Bricker explained.

To the fill the gap, registrants need to look to their own policies, their audit committees, and other stakeholders, Bricker advised.

“It’s appropriate for audit committees to focus on this area, and there is clear room for a dialogue with auditors about controls and procedures,” he said.

The SEC’s chief accountant also pointed out that the GAAP reporting framework could be a good guideline. “If you think about the construct of [internal controls over financial reporting] and protecting the integrity of GAAP, it’s a useful starting point for the kind of infrastructure that is appropriate for supplemental information — the non-GAAP, operational metrics, or other reporting frameworks a company may adopt.”

Companies should also consider whether it would be beneficial to obtain insight into their other reporting processes from parties outside of the finance and investor relations functions.

“Sometimes a fresh perspective can provide new insight into potential risks and ways to maintain the effective operation of essential controls and procedures,” Bricker added.