The Center for Audit Quality is offering an online set of questions to help audit committees determine whether the use of non-GAAP measures is appropriate or not.
The document comes at a time when the Securities and Exchange Commission has been pushing back against the increasing use of non-GAAP measures to tout corporate performance, with the traditional GAAP metrics all too often relegated to a less prominent part of companies’ quarterly earnings releases (see Companies Inflated Profits $164 Billion with Non-GAAP Metrics).
Questions on Non-GAAP Measures divides the questions that audit committee members should ask into three main categories— transparency, consistency and comparability. Board members might ask management about the purpose and prominence of the non-GAAP information, and how it is labeled, compared to traditional GAAP measurements. It suggests ways that audit committees can ask management about how consistent and balanced the non-GAAP measures are, including whether or not they eliminate items that might have an impact on revenue and expenses. Audit committees can also ask corporate executives about whether other companies use similar non-GAAP measures and why they might be important for a particular company, but not similar peer companies.
The document reviews the current regulations from the SEC and the Public Company Accounting Oversight Board regarding non-GAAP measures, along with the role of auditors in this area. PCAOB standards require auditors to read this additional information to make sure it is consistent with the company’s financial statements.
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