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Here’s an excerpt from this Audit Analytics blog (also see these memos posted in our “Non-GAAP Measures” Practice Area):

According to Audit Analytics’ research published in a recent WSJ article, however, there is some evidence of a changing tide; in the most recent quarterly reports, more than 80% of the SP500 companies reported GAAP results first, compared to 52% in the prior quarter.

Nevertheless, only a handful of companies have so far stated their intent to drop non-GAAP numbers completely. The vast majority of companies will still present non-GAAP results, albeit presented after comparable GAAP numbers, with better labeling and clearer descriptions.

But let’s take this line of thought a bit further. If custom metrics are so important to investors, then, analogous to GAAP results, it should be important to investors when non-GAAP metrics turn out to be misstated. What would happen if non-GAAP numbers were to be revised – for example, to correct an error?

We have seen a few instances where this question would be very relevant. In a handful of cases where non-GAAP numbers were intentionally manipulated, we’ve seen an array of related negative events (including management turnover and SEC investigation), which makes these cases hard to overlook. So if errors are found in non-GAAP metrics, how should investors be notified? Non-GAAP numbers are not audited, there is no Item 4.02 requirement for them, and there are rarely any SOX 302 or 404 implications.

A few recent examples, provided below, provide some insight into how companies may disclose error corrections that affected only the non-GAAP presentation (i.e., comparable GAAP results were not revised). In both cases, the correction was discussed in a footnote to the non-GAAP reconciling tables.

Also check out this MarketWatch article which notes that the SEC’s Enforcement Division & DOJ brought a parallel case against a financial professional at a REIT for using non-GAAP metrics fraudulently…

Edgar Filings: 9 FAQs

Recently, the SEC’s Edgar Filer Support posted these 9 FAQs about common issues that folks have when filing…

Internal Controls: A 12-Year Review

Here’s an excerpt from this Audit Analytics blog:

Overall, the percentage of adverse 404 auditor opinions has seen a steady decrease, from 15.7% in 2004, the first year the requirements went into effect, to 5.3% in 2015. However, a less encouraging trend – depending on one’s perspective – is hidden in that overall view; the percentage actually hit its lowest point in 2010, at 3.4%. Since, we have seen an increase in the percentage of adverse 404(b) audit opinions.

Beginning in 2010, the PCAOB began to place a strong emphasis on whether the auditor obtained adequate evidence to substantiate its attestation of the effectiveness of ICFRs. This focus on the part of the PCAOB appears to have had an impact.

Turning our attention to smaller companies, we see a very different picture. One interesting aspect of our report highlights the difficulties faced by non-accelerated filers in achieving an effective level of internal controls over financial reporting. While larger companies rarely (5.3% in 2015) have material weaknesses in their ICFRs, smaller companies are much more often to be found in the weeds.

– Broc Romanek