Questions About Non-GAAP Measures for Audit Committees
The Center for Audit Quality — an autonomous, nonprofit public policy organization composed of accounting professionals — has compiled a checklist of possible questions for audit committees to ask management and external auditors before using non-GAAP metrics. Here are 11 of its questions that address the transparency of non-GAAP disclosures:
- What’s the purpose of the non-GAAP measure, and would a reasonable investor be misled by the information?
- Has the non-GAAP measure been given more prominence than the most comparable GAAP measure?
- How many non-GAAP measures have been presented, and are they all necessary and appropriate for investors to understand performance?
- Why has management selected a particular non-GAAP measure to supplement GAAP measures that are already established and consistently applied within its industry or across industries?
- Does the company’s disclosure provide substantive detail on its purpose and usefulness for investors?
- How is the non-GAAP measure calculated, and does the disclosure clearly and adequately describe the calculation, as well as the reconciling items between the GAAP and non-GAAP measures?
- How does management use the measure? If so, has that use been disclosed?
- Is the non-GAAP measure sufficiently defined and clearly labeled as non-GAAP; could it be confused with a GAAP measure?
- Are per-share non-GAAP measures in substance per-share non-GAAP liquidity measures, which are prohibited, or could they be used as liquidity measures even if disclosed as a performance measure?
- What are the tax implications of the non-GAAP measure, and does the calculation align with the tax consequences and the nature of the measure?
- Does the company have material agreements, such as a debt covenant, that require compliance with a non-GAAP measure? If so, is it disclosed?
This list isn’t all-inclusive. The Center for Audit Quality provides additional questions that address the consistency and comparability of non-GAAP metrics. A company and its audit committee should take a customized approach in evaluating whether non-GAAP will enhance GAAP performance measures — or mislead investors into believing a rosier story about the company’s short-term performance than what’s told by U.S. GAAP figures.
To discuss this further, contact Dan Ward, Principal, Audit Services, at 314.983.1237 or firstname.lastname@example.org.