Non-GAAP financial reporting: an ethical analysis

The use of non-GAAP measures in financial reporting has grown exponentially over the last two decades and is now effectively used by almost all publicly traded corporations. The SEC’s former chief accountant of the Enforcement Division, Howard Scheck, called non-GAAP metrics a “fraud risk factor”, and the SEC formed a task force in 2013 to scrutinize whether they could be misleading. The potential misuse of these measures continues to be of great concern to the SEC. For the year ending June 30, 2021, more SEC comment letters were issued surrounding their use (37 percent) than on any other topic. This chapter provides a detailed discussion of the usage of non-GAAP measures, the SEC regulatory framework surrounding their use, the need for strong corporate governance systems to protect the investing public, and ways in which the risk of their misuse can be mitigated. We provide a cost-benefit and ethical analysis surrounding the use of non-GAAP measures to better understand whether their usefulness exceeds the costs to gather and report the information, and how basic ethical values affect disclosures. We conclude by suggesting that the time has come for the PCAOB to step in and require these measures to be audited.