Cindy Fornelli of the Center on Audit Quality writes about perspectives from a series of roundtables with audit committee members, management, investors, securities lawyers, and public company auditors on non-GAAP reporting:
If GAAP is the bedrock, why do companies present non-GAAP measures?
Participants were asked to share their views on what drives the presentation and use of non-GAAP measures. Several common themes emerged from the discussion.
Demand from investment analysts: Participants shared that requests from investment analysts are often a primary reason company management chooses to present a non-GAAP measure. Investment analysts find that non-GAAP measures help them better understand the company’s underlying business performance or forecast the company’s long-term value in their proprietary models.
Desire to tell the company’s story: Participants also acknowledged, however, that company management does not present non-GAAP measures solely for investment analysts. Rather, non-GAAP measures can be a tool to help tell a company’s story and provide users of the information with insight into how management evaluates company performance internally. In some cases, non-GAAP measures are also an input into how the company compensates employees for company performance.
It seems to us that if GAAP is seen as inadequate by both investors and executives, it is time to rethink GAAP rather than add on another series of disclosures that are not standardized or consistent.