Risk & Compliance

SEC Intensifies Focus on Non-GAAP Metrics

While the number of comment letters the commission sends to filers has waned drastically, the proportion of letters focused on non-GAAP metrics has...
David McCannOctober 23, 2018
SEC Intensifies Focus on Non-GAAP Metrics

Complementing its recent report on companies’ increasing usage of non-GAAP metrics, Audit Analytics has released data on the SEC’s enforcement of its guidance for use of the unofficial financial measures.

This year, through the first six months the Securities and Exchange Commission sent 1,409 comment letters (of all types) to registrants. That represents a drastic and ongoing drop from the 15,646 comment letters the commission sent in 2010 (full year).

At the same time, though, the percentage of registrants that received at least one comment letter related to non-GAAP matters leaped from 9% to 25% over that period. The increase portrays the extent to which non-GAAP usage is currently dominating the SEC’s enforcement activities.

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But because the total volume of comment letters has fallen so dramatically, the raw number of letters relating to non-GAAP issues has plunged as well, from 1,392 in full-year 2010 to 353 in the first half of 2018.

Further, this year’s 25% of registrants receiving at least one letter dealing with non-GAAP is actually much lower than the corresponding figures in 2016 and 2017 (35% and 37%, respectively). This “indicates that companies are starting to self-correct,” Audit Analytics said.

Before 2016, that percentage rose only gradually from year to year. But that was the year the SEC released a series of Compliance and Disclosure Interpretations, clarifying its guidance for non-GAAP usage. Since then, when companies haven’t adhered to the C&DIs, the SEC has let them know about it.

The SEC’s most common objection is to registrants giving non-GAAP metrics too much prominence in their communications. In the first half of 2018, 22% of SEC comment letters contained such objections.

But that was way down from 38% and 37% in 2016 and 2017, respectively. In place of those objections, the prevalence of others has increased this year by smaller margins.

Those include presenting non-GAAP measures on a “net of tax” basis (12% of non-GAAP comment letters); presentation of measures that use individually tailored recognition and measurement methods (12%); presentation of a performance measure that excludes normal, recurring cash operating expenses (9%); presentation of free cash-flow metrics (9%); and reconciliation of EBITDA or EBIT to something other than net income (6%).

“Trends to keep an eye on include the non-GAAP measures that are complicated by complex accounting practices and require that detailed explanation of unique circumstances be provided,” Audit Analytics said.

“It will be interesting to see if the trend of the SEC nudging companies for better explanations will endure, or if registrants will make an effort to provide more clarification on financial statements.”