The Center for Audit Quality (CAQ) on March 16, 2018, published a guide to help public company audit committees oversee management’s use of non-GAAP (generally accepted accounting principles) financial measures.
The guide, Non-GAAP Measures: A Roadmap for Audit Committees, “provides a set of key considerations for audit committees, including leading practices to assess whether a company’s non-GAAP metrics present a balanced representation of the company’s performance,” said the CAQ, an affiliate of the American Institute of Certified Public Accountants (AICPA). “GAAP information serves as a foundation for confidence in financial statements, but financial statement users also value non-GAAP financial measures, when presented appropriately.”
The guide advises audit committees to stand in for investors when evaluating whether the non-GAAP measures and related disclosures match up with the company’s overall strategy and performance. Audit committee should ask management whether it has an internal policy that provides a guideline on how non-GAAP numbers are generated and presented, the CAQ said. Audit committees should also discuss with management how it changes non-GAAP measures and its rationale for the changes.
The CAQ also suggests that the audit committee ask management to compare or benchmark its non-GAAP measures to competitors.
In addition, the CAQ said that external auditors can help audit committees evaluate non-GAAP measures.
“There was consensus among participants that audit committees can promote rigor related to non-GAAP measures by having a dialogue with company management as well as internal and external auditors,” the roadmap said.
The CAQ said discussions at each roundtable highlighted some leading practices that several companies have implemented to present a balanced view of their performance when presenting non-GAAP measures.
Among other things, companies should establish disclosure controls specific to non-GAAP measures.
“The disclosure controls should be documented and robust enough to facilitate testing of the controls,” the roadmap said. “Participants emphasized that such disclosure controls could drive more consistency and transparency into preparation and presentation of non-GAAP measures.”
In addition to the roadmap, the CAQ has posted a companion video that features interviews with audit committee chairs to provide more context.
The CAQ put together the 12-page guide after holding three roundtable discussions in 2017 to explore the perspectives of audit committee members, company managers, investors and securities lawyers on non-GAAP measurements. Each roundtable focused on a specific industry—pharmaceutical, real estate and technology—because the presentation and use of non-GAAP metrics can vary from industry to industry.
The CAQ’s effort comes as companies have been increasingly using non-GAAP metrics in its earnings releases to highlight their financial strengths and gloss over weaknesses. The Securities and Exchange Commission (SEC) has warned companies to follow its rules for non-GAAP measures. Some investors say that unlike U.S. GAAP, which promotes consistency and reliability, the unaudited performance numbers are hard to evaluate or compare among competitors.
Currently, few, if any, companies disclose their non-GAAP policies, the CAQ said.
There was no consensus among the participants in the roundtables whether disclosure of the company’s non-GAAP policies would be a good practice.
“However, given the current regulatory environment and the fact that non-GAAP measures are important to investors and are central to their decision making, there could be benefits to an audit committee voluntarily disclosing that the company has non-GAAP policies,” the CAQ said. “Such disclosure could demonstrate to investors the importance of this information to the audit committee and that policies are in place to support the metrics being consistent, transparent and comparable.”
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