SEC Launches Probes Into Abuse Of Adjusted Earnings Metrics

By:
Chris Gaetano
Published Date:
Oct 28, 2016
'MIND THE GAP 5023794412' by http://www.cgpgrey.com. Licensed under CC BY 2.0 via Wikimedia Commons

The Securities and Exchange Commission (SEC) has been contacting individual companies informing them that they will be examining their use of non-GAAP adjusted earnings measures to determine whether they are appropriate, according to The Wall Street Journal. While it is currently unknown how many companies are being targeted in this probe, or when and whether it might take any action against them, The WSJ said that its focus will be on whether the custom measures are featured too prominently in earnings releases and other disclosures. Non-GAAP metrics have been of increased concern to the SEC over the past few years, which chair Mary Jo White said could cause confusion among investors over what the actual figures are. 

During the FAE's SEC Conference earlier this week, however, Deputy Chief Accountant Craig Olinger said that the commission is not looking to crack down on all non-GAAP metrics, some of which can play important roles. He said that the commission's focus will be on only their more problematic uses, of which undue prominence to custom measures was listed as one. Other abusive uses of non-GAAP measurements he listed included companies excluding normal cash operating expenses from non-GAAP measurements; cherry picking favorable adjustments and pulling out unfavorable ones; substituting individually tailored revenue recognition measurement standards for the one in GAAP; accelerating revenue from subscriptions into a larger lump sum; including things in a non-GAAP measurement under which the company has no control; and income tax adjustments that have little, if any, connection with reality. 

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