Deloitte has some tips to help companies deal with the Securities and Exchange Commission’s guidance on the use of non-GAAP measures.

The SEC has stepped up its efforts to discourage companies from overemphasizing non-GAAP metrics at the expense of standard accounting measures when announcing their earnings results to the public. In May, the SEC’s Division of Corporation Finance issued a set of Compliance & Disclosure Interpretations pertaining to the rules and regulations on non-GAAP financial measures. Deloitte’s alert, “Heads Up—Controls and non-GAAP measures,” describes some of the controls that companies can put in place and offers several examples to consider.

“The SEC has come out with some new guidance in the last couple of months, and obviously our clients are focused on it,” said Deloitte partner Jeff Aughton, who co-authored the article. “As they’re refocusing on the compliance of their non-GAAP disclosures, we suggested that it would be an opportune time for them to look at the controls that monitor those non-GAAP disclosures. There’s a lack of clarity as far as the additional requirements out there between financial statement certifications as well as broader certification of the full filed documents. We wanted to offer some clarity around that, make some suggestions in regards to the rigor of individual controls to ensure compliance, as well as give an example to tell companies to think through and compare and contrast what they do to what others do to try to come up with a control that ensures the reliability and accuracy of the non-GAAP disclosures.”

He believes there is still room for non-GAAP measures, as long as they’re adequately disclosed. “I think the stress with what the SEC has said through their recent compliance disclosure interpretations is that there are situations where non-GAAP disclosures, particularly when there are stakeholders who believe that they are relevant as long as they’re disclosed properly, that there is a place for those,” said Aughton. “But as you read through the SEC’s interpretations, really what they’re trying to ensure is a fair bit of consistency from period to period. There is a list of taboos, where you should not use non-GAAP disclosures in certain situations, and the way they’re presented from a prominence standpoint. Once you have that list of rules and interpretations from the SEC, the key is to ensure you don’t cross the line.”

If companies use non-GAAP disclosures, they should be meaningful to stakeholders as well as accurate. “You wouldn’t want to have an error in one of those key measures that you’re putting forth,” said Aughton.

He pointed out that firms like Deloitte don’t actually audit that information since it generally falls outside the financial statements. “But we do review it and we do provide comments and feedback if we believe there are material inconsistencies with it,” he added.

Aughton noted that the audit committee in many large companies typically gets involved in the process, along with a disclosure committee.

“What you tend to see is that the ownership of it starts at the controller level or the financial reporting level, and then there’s a committee that works to ensure that the disclosures are consistent with what their plans are for their stakeholders, making sure that they’re in compliance,” he said. “But ultimately everything that’s pulled together within the financial statements is the responsibility of the audit committee, so the audit committee as we point out should be aware of those non-GAAP measures and should be aware of the controls put around them to ensure they’re in compliance and that they’re accurately calculated. The disclosure committee and the audit committee are generally separate, from my experience. Generally the disclosure committee is made up of senior executives of the company who really are tasked with assisting the CFO and the CEO, who are signing the certifications of those financial statements, and helping them ensure the information is correct, so you’re using some of your best people who have the broadest view of the organization to take a look at the measures before they’re finalized. That’s the purpose of the disclosure committee.”

Beyond the “heads up” advisory, Deloitte is working on a more comprehensive guide to help companies cope with non-GAAP measures. “We are actually developing a broader guide to give some thoughts and some examples around some of the limitations and some of the items that are allowable, underneath the new interpretations,” said Aughton. “It’s sometimes difficult to interpret the standards out there. We’re trying to put a practical edge onto it, so that people can look at it and see some questions and some answers from Deloitte’s point of view that may be helpful to a client, and maybe some examples around that, so clients can then compare and contrast their own approach to what we’ve put forth into a broader toolkit.”

In the meantime, he advises companies to take a closer look at their controls. “What I thought was pertinent was making sure that we had clarity around the matter and then looking at the opportune time to look at controls,” said Aughton. “Given the importance of these measures to stakeholders, you want to make sure that they’re reliable, accurate and consistent.”

Companies that are trying to deal with the SEC’s renewed scrutiny of non-GAAP measures are also calling on outside legal counsel. “Anytime the SEC puts out new guidance our clients focus on it,” said Aughton. “It is an issue that’s popping up during quarterly reviews and those going through audits right now, so it is top of mind and everybody wants to ensure that they’re addressing the new interpretations. As far as Deloitte’s input on it, again we don’t audit the information, but clearly we are having conversations with our clients. Their key focus is comparing and contrasting what they are doing to ensure that they’re interpreting the new rules correctly, but also to get sort of an outside view of whether or not the information appears to be in compliance. I also see our clients working with their outside attorneys because the attorneys tend to focus on these non-GAAP measures, particularly outside the financial statements, from a legal interpretation. There is a lot of activity around it.”