Companies Inflated Profits $164 Billion with Non-GAAP Metrics

U.S. corporations overstated their net income more than $164 billion last year by publicizing non-GAAP measures, according to a new report.

The report, from Calcbench and Radical Compliance, examined the earnings releases of 816 companies, comparing the “non-GAAP” net income companies typically promote at the top of their earnings releases against the formal net income numbers under U.S. GAAP. Companies made more than 4,600 adjustments to their GAAP net income figures, usually justifying such adjustments by claiming they provided a better sense of financial performance than what traditional GAAP net income permits.

Those adjustments resulted in non-GAAP net income figures that together totaled $164.1 billion above the true GAAP net income reported further below in the earnings release.

The report discusses which adjustments are used most often, and which ones cause the biggest differences between GAAP and non-GAAP net income. It also examines the differences between different business sectors in how they reconcile GAAP with non-GAAP net income, along with the size of those differences within the various sectors. The report also provides the specific non-GAAP reporting of 13 large filers, to provide examples of the size and nature of non-GAAP financial metrics today.

“This is one of the most comprehensive analyses not only of how much companies adjust net income, but also of how they justify those adjustments,” said Calcbench CEO Pranav Ghai in a statement. “We now have quantifiable data to answer questions about the role non-GAAP metrics play in financial reporting.”

The report includes an in-depth analysis of the use of non-GAAP measures by three companies—Facebook, HP and Merck—along with a companion PowerPoint presentation examining seven other companies.
The Securities and Exchange Commission allows reporting of non-GAAP metrics within certain limits, but this year a number of top SEC officials have been criticizing the misuse of such nonstandard measures.

Companies are supposed to explain to investors why their non-GAAP metrics provide useful information, and they need to reconcile their non-GAAP metric with the closest similar GAAP-approved metric—in this case, net income. But in some cases, the SEC has ordered firms to stop using certain non-GAAP metrics altogether.

“Non-GAAP metrics can sometimes push the boundaries of proper financial reporting and corporate governance,” said Radical Compliance CEO Matt Kelly. “This report detects broad patterns in companies’ thinking and usage of non-GAAP, and hopefully we can have more precise conversations about how far is too far.”