June 13, 2017

Non-GAAP: Maybe You Can Fight City Hall? (Nah, Not Really)

This Bass Berry blog discusses this recent WSJ article. Here’s an excerpt:

The article also makes clear that, if the Corp Fin Staff questions the use of a non-GAAP financial measure in the comment letter process, a public company may be able to convince the Staff that the use of a particular non-GAAP financial measure is appropriate and compliant.

The article notes, however, that the ability of public companies to prevail may be correlated with the nature of the non-GAAP financial measure being used, and that public companies have been less successful in defending their usage of non-GAAP revenue-based measures (which have been the subject of particular scrutiny by the Staff) in comparison to non-GAAP earnings-based measures.

Just like with other types of Staff comments, resolving a non-GAAP comment without being required to make a change in disclosure remains quite common. For example, the Corp Fin Staff has said at multiple conferences that they didn’t expect practice to change much for restructuring & related exclusions – and that is exactly what happened. And on the speaking circuit, Corp Fin Staffers have been talking recently about the success of the non-GAAP project and how they expect comment volume in this area to drop…

Audit Reports: Will “Critical Audit Matters” Become “Fighting Words”?

Like most of what is referred to – apparently without irony – as “accounting literature,” the definition of the term “critical audit matters” seems dull & lifeless. Under the PCAOB’s new auditing standard, critical audit matters are “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.”

The definition may not sound exciting – but this recent blog from Cooley’s Cydney Posner says that its application may result in some real battles between auditors & management:

I don’t think I’d be going too far out on a limb if I predicted that we might see some disputes erupt over CAM disclosure. Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria.

But will auditors’ judgments about which CAMs were the real nightmares be called into question? Will the new disclosure requirement precipitate many auditor-management squabbles over the CAMs selected or the nature or extent of the disclosure?  And just how enthusiastic will the CFO be about the prospect of the auditor’s sharing with the investing public the convoluted nature or opacity of the company’s policies or the struggles involved in performing the audit or reaching conclusions about the financials?

While the process of identifying CAMs is supposed to involve collaboration, auditors may be unlikely to give much weight to management & audit committee input – and may use the new requirement as a leverage point in disclosure disputes with management.

Tomorrow’s Webcast: “Proxy Season Post-Mortem – Latest Compensation Disclosures”

Tune in tomorrow for the webcast — “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of and Jenner & Block, Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

John Jenkins