SEC Task Force Scrutinizing Use of Non-GAAP Measures

By Cydney Posner

This article in The Wall Street Journal,  , reports that the SEC's new Financial Reporting and Audit Task Force is scrutinizing companies' use of non-GAAP performance measures. The 12-member task force was created in July, in an effort to "return to closely scrutinizing accounting issues after focusing on other areas."

At an AICPA conference, the head of the task force, while not mentioning any specific companies, gave "the first indication that the SEC is looking at these metrics with an eye toward possible enforcement cases." According to the article, the "task force is particularly interested in cases of mislabeling,…when companies use common, well-defined terms to refer to their own performance measures." The article contends that technology companies often use these "nonstandard performance measures that strip out expenses like interest, taxes, depreciation and stock payments to employees to enable them to tout a profit, rather than the loss they report under GAAP. The matter has drawn more attention in recent weeks because of hot initial public offerings by tech companies that use the measurements." The concern is that the "use of nonstandard metrics have the potential to mislead investors."

The head of the task force indicated that the they are also looking at "trends and patterns that could indicate a risk of fraud, such as cases in which a company shows high reported earnings but has lower earnings for tax purposes, or when a company has a high proportion of transactions that are kept off its balance sheet." The focus of the task force "is on ‘incubating' investigations of accounting and auditing for the SEC's enforcement division to pursue," according to the SEC's co-director of enforcement.

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