CAQ Releases New Non-GAAP Measures Tool for Audit Committees

by WilmerHale

While the frequency of SEC comments on companies’ disclosure of non-GAAP measures has subsided, it remains important for audit committees to ensure their companies’ disclosures comply with applicable non-GAAP disclosure rules.  To assist in this regard, the Center for Audit Quality has released a new report titled Non-GAAP Measures: A Roadmap for Audit Committees.  The report summarizes general themes emerging from three roundtable discussions that the CAQ hosted in 2017 regarding the presentation and use of non-GAAP measures and provides some guidance for audit committees to consider when reviewing their companies’ preparation and disclosure of non-GAAP measures.  Notably, use of the term “non-GAAP measures” in the report refers to measures defined as “non-GAAP” under SEC rules and also to key performance indicators (KPIs), which are not directly subject to the SEC’s non-GAAP rules but which the SEC staff has suggested may need to be accompanied by similar disclosures.

Themes from 2017 Roundtables.  Each of the CAQ’s 2017 roundtable discussions were attended by 20 to 25 individuals representing audit committee members, management, investors, securities attorneys and public company auditors.  The discussions explored the following five areas:

  • why management discloses non-GAAP measures; 
  • how management approaches preparing and presenting non-GAAP measures;
  • how audit committees oversee that process;
  • how investors and others use non-GAAP measures; and
  • what, if anything, could be done to enhance trust and confidence in non-GAAP measures.

It was clear from the roundtable discussions that audit committees across industry sectors engage in discussions about non-GAAP measures with company management and, to some extent, with their external auditors.  As the report states, “[f]rom these roundtables, broad, shared themes coalesced regarding why the information is presented and how non-GAAP measures are used.  More importantly, the challenges non-GAAP measures present—and the opportunities for ways to approach improving trust and confidence in these measures—were also consistent across industries.” 

Roundtable participants generally found non-GAAP measures to be useful and identified demand from investment analysts and a desire among management to tell a company’s story among the primary drivers for presenting non-GAAP measures.  Participants generally viewed GAAP information as a useful “bedrock” or “starting point” that allows for comparability from one company to the next.  While participants identified the lack of consistency in non-GAAP measures as a challenge, management participants expressed some concern that standardizing non-GAAP measures may limit the ability to effectively communicate a company’s story to investors.  Some participants expressed beliefs that certain changes to GAAP reporting could reduce the number of non-GAAP measures that companies present.  Participants did agree that it generally is useful for non-GAAP measures to meet the following criteria in addition to satisfying applicable SEC disclosure requirements:

  • be calculated and presented consistently;
  • be transparently disclosed; and
  • be comparable to measures disclosed by other companies.

Roundtable participants also agreed that increased audit committee oversight and involvement with non-GAAP measures can play a vital role in the quality of non-GAAP measures presented.  In this regard, the report highlights the added rigor that audit committees can promote by engaging in dialogue with management and their companies’ internal and external auditors.  As the report notes, “this dialogue would be for the audit committee to set clear expectations regarding the roles and responsibilities—relative to non-GAAP measures—of each member of the financial reporting supply chain.”

Leading Practices.  Among the areas of general consensus emerging from the CAQ’s roundtable discussion are the following leading practices to support the presentation of non-GAAP measures that reflect a balanced view of a company’s performance:

  • Disclosure controls.  Roundtable participants “generally agreed that non-GAAP measures should be subject to robust disclosure controls.”  Such controls should be documented and comprehensive enough to facilitate control testing.  Having such controls in place could improve consistency and transparency regarding a company’s non-GAAP measures.
  • Non-GAAP policies.  Management representatives participating on the CAQ’s roundtables noted that they generally have adopted guidelines for preparing and presenting non-GAAP measures, which can help guide decision-making surrounding the treatment of new transactions within a company’s existing non-GAAP measures.  The guidelines also enhance consistency in the preparation and presentation of a company’s non-GAAP measures. 
  • Disclosure about Non-GAAP policies.  The report notes that “[f]ew, if any, companies currently disclose their non-GAAP policies.”  While roundtable participants did not reach consensus about whether disclosure of a company’s non-GAAP policies (or disclosure that a company has a non-GAAP policy) would be a good practice, the report indicates that there could be benefits to disclosing that a company has adopted a non-GAAP policy (without disclosing the details of the policy).  The report suggests that “[s]uch disclosure could demonstrate to investors the importance of this information to the audit committee and that policies are in place to support the metrics being consistent, transparent, and comparable.”

Roadmap of Discussion Topics.  Recognizing the audit committee’s important responsibility to oversee the financial reporting process and external audit, the report highlights that the audit committee is well positioned to bridge management communications with investors and can assess management’s rationale for presenting non-GAAP measures.  The audit committee is also well positioned to question management regarding whether proposed non-GAAP measures are fair and balanced.  For purposes of engaging with management, the report suggests that audit committees may want to consider the following roadmap of topics:

  • Putting itself in the investors’ shoes when evaluating if the presented non-GAAP measures and related disclosures align with the company’s overall strategy and performance.
  • Engaging with investors directly or through investor relations to ensure that the presented non-GAAP measures aid investors’ understanding of the company’s performance.
  • Asking management whether it has an internal policy that provides guidelines for determining how non-GAAP measures are generated, calculated, and presented, including the rationale for the measures and adjustments that it presents and excludes. If there is no policy, encourage management to create one.
  • Discussing with management how the company makes changes to non-GAAP measures it presents, and the rationale for why it would or would not make changes.
  • Seeking the perspective of counsel on non-GAAP measures.
  • Asking the company to compare or benchmark its non-GAAP measures to those of its peers.
  • Finding out what disclosure controls and procedures are in place as they relate to the information that is presented and disclosed.
  • Asking the external auditors what their responsibilities are for non-GAAP measures, and whether that responsibility is different depending on where non-GAAP measures are presented.
  • Asking the external auditors for perspectives on how non-GAAP measures that the company presents generally compare with those of other companies.
  • Discussing with the external auditors what their views are on the company’s non-GAAP measures, including whether the measures are consistent with the auditors’ understanding and knowledge of the company’s performance.

External Auditor Considerations.  As a reminder for audit committees, the report notes that external auditors do not audit non-GAAP measures in connection with an audit of a company’s financial statements or internal control over financial reporting.  Applicable auditing standards, however, recommend that auditors should read non-GAAP measures presented in documents containing the financial statements (e.g., annual or quarterly reports) and consider whether such measures are materially inconsistent with information appearing in the financial statements or otherwise contain a material misstatement of fact.  The report suggests that audit committees and management may want to consider engaging the external auditor to perform certain procedures (e.g., testing controls regarding the preparation and disclosures of non-GAAP measures) to bolster trust and confidence in a company’s non-GAAP measures.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© WilmerHale | Attorney Advertising

Written by:


WilmerHale on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.