SEC Task Force Scrutinizing Non-GAAP Measurements

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A new Financial Reporting and Audit Task Force formed by the Securities and Exchange Commission is scrutinizing companies’ use of measurements that do not comply with generally accepted accounting practices (GAAP), according to the panel’s leader. David Woodcock, Chairman of the task force, shed some light on its activities in a speech at a conference of the American Institute of Certified Public Accountants on December 10, 2013, The Wall Street Journal reported.

The task force was launched in July. (We reported on how the SEC has stepped up its investigation and enforcement of accounting-related matters in a previous alert.) While Mr. Woodcock has spoken previously about its direction, the Journal considers his comments to be the first specific indication “that the SEC is looking at [non-GAAP] metrics with an eye toward possible enforcement cases.”

Mr. Woodcock stated that the task force is examining so-called non-GAAP indicators by companies that he believes conflate commonly used performance-indicating terms with “nonstandard measures” to enhance their standing and claim profits rather than losses, a move he terms “mislabeling.” Though the Journal noted that nonstandard measurements themselves are not disallowed, companies must explicitly state which ones are nonstandard and reconcile those with standard measurements.

The article further suggests that recent initial public offerings by technology companies may have sparked the task force’s review of the terms companies use when reporting to potential investors. Specifically, the task force is examining instances where companies reveal high earnings using non-GAAP metrics to the public but disclose lower earnings for tax purposes, as well as other trends that may indicate fraud. This endeavor aligns with the SEC’s statement that the task force’s agenda is to detect “fraudulent or improper financial reporting” and to “enhance the [Division of Enforcement’s] ongoing enforcement efforts related to accounting and disclosure fraud.”

Though Mr. Woodcock did not disclose any specific companies that the task force is reviewing, his statements and the purported agenda of the task force could have meaning for public companies as well as their officers and auditors in other sectors besides the technology industry. These cases cannot be expected to come to a head overnight, however. Andrew Ceresney, Co-Head of Enforcement for the SEC, noted at the conference, “These cases are not easy cases,” and, “We need to have patience, and results will not happen overnight.” As the article further points out, there are roughly 12 members of the task force, consisting of both attorneys and accountants.