Risk & Compliance

Report Details Ubiquity of Non-GAAP Metrics

Some findings seem to support allegations that companies are practicing "earnings management."
David McCannOctober 15, 2018
Report Details Ubiquity of Non-GAAP Metrics

It’s no secret that companies have for some time been steadily using more non-GAAP metrics to quantify their financial performance, leading to accusations of earnings management.

A new report portrays just how stark the shift toward the unofficial financial measures has been.

Audit Analytics looked at approximately 300 companies that were publicly held in both 1996 and 2016. Among that sample, the proportion of S&P 500 companies that reported non-GAAP metrics in 8-K or 10-K regulatory filings climbed from 59% in 1996, to 76% in 2006, to 96% in 2016.

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The figure ticked up again in 2017, to 97%.

Among companies within the sample that used non-GAAP metrics, the number of such metrics used per filing shot up even more, tripling from 2.35 in 1996 to an eye-catching 7.45 in 2016.

Among all S&P 500 companies in 2017, 82% used operating income or another non-GAAP income metric. Next-most common were non-GAAP metrics related to earnings per share (79%), cash flow (35%), and EBITDA or adjusted EBITDA (24%).

Another finding seemingly supports charges that companies use non-GAAP metrics to cast their financial performance in an unrealistically positive light.

Among 342 companies that reported some kind of adjusted net income metric in 2017, in more than two-thirds (69%) of the cases the non-GAAP figure exceeded GAAP net income. The average per-company disparity between the two figures was more than $1.3 billion.

The other 31% of companies reported adjusted net income that was lower than GAAP net income, and the average disparity was just $873 million.

Even so, the proportion of companies reporting adjusted net income higher than the official income figure is typically much greater than the 69% figure in 2017 — for example, it was 84% in 2016 and 86% in 2016. Last year’s anomalous number was largely a result of many companies excluding one-time tax charges related to the Tax Cuts and Jobs Act.

To whatever degree companies are in fact using non-GAAP metrics as an earnings-management ploy, the use of EBITDA may be a particularly bold subterfuge.

Under Regulation G, which sets forth the regulatory framework companies are required to follow in presenting non-GAAP metrics, any EBITDA metric that excludes from income any items other than interest, taxes, depreciation, and amortization must be labeled as “adjusted EBITDA.”

However, according to Audit Analytics, among 46 companies that labeled a non-GAAP metric as EBITDA in 2017, more than half (24) excluded an item other than those. For example, two companies excluded acquisition-related items and two others excluded impairment-related costs.

The use of non-GAAP metrics is, of course, much more prevalent than suggested by Audit Analytics’ review of regulatory filings.

As the firm noted in its report, “Other filings and presentation materials, including proxy statements and corporate presentations, may include metrics that differ from those disclosed in earnings releases.”