Question

The Securities and Exchange Commission (SEC) is mandated to regulate the financial statements of publically traded reporting corporations.   Recently, the SEC has renewed their focus on Non-GAAP reporting issues that are impacting the valuation process of regulated companies.

In 2003, the SEC issued Reg G which restricted a company’s ability to deviate from compliance with GAAP regulatory pronouncements. Prior to the issuance of REG G, major reporting issues pertaining to ENRON had resulted in the SEC becoming aware of misleading reports due to Non-GAAP Compliance Issues. Recently, 380 out of the S & P’s 500 reporting entities reporting a DECREASE to GAAP Net Income but an INCREASE to Non-GAAP Net Income. WHY? The primary differences were the result of EXCLUDED EXPENSES on the Non-GAAP Compliant reports. Many reporting entities were classifying certain routine, recurring operating expenses as NONRECURRING items. For example: Restructuring Costs and / or Impairment Costs are NOT included in the Non-GAAP reports because the management team felt the financial value of the company’s results were undermined by these rare costs. This process is allowed by the SEC…but…redefining operating expenses as Non-Recurring expenses in an attempt to enhance their financial results has become a motivating driver to this problematic process.

The SEC brought their first “Pro Forma Financial Reporting Case on January 16, 2002 against Trump Hotels & Casinos. The case centered upon the abuse of Pro Forma earnings which resulted in a misleading Q3 1999 Pro Forma Earnings Release which was inflated to exceed the analysts expectations. In 2009, the SEC brought similar charges against SafeNet Inc’s management team charging them with a scheme aimed at reclassifying recurring operating expenses as non-recurring (Nov 2009.)

Groupon, in their Initial Public Offering (IPO) filings in 2011 stated …”they do not measure themselves in conventional ways.” The result was overstated profits that lead to inflated stock valuation prices and the need to restatement prior financial reports. Many in the business world believe that many companies are focused on reported EBE = Earnings BEFOR Expenses…rather than EBITA = Earnings Before Interest , Taxes & Amortization.

In an article dated June 29, 2016, the financial reporting community stated that reporting companies “inflated profits by $164 Billion using Non-GAAP Measures” which clearly indicates the problem is on-going and material.

Start your research process by reading SEC 100 Gen rules. You can also refer to Sarbannes-Oxley (SOX) legislation where the pronouncement “strongly discourages Non-GAAP reporting. Read the issues the SEC had with Trump Casinos, SafeNet Inc and Groupon. I want you to discuss the GAAP vs. Non-GAAP compliance issue and integrate the following questions into your response.

1.) Does the use of Non-GAAP reports impair the ability to compare prior periods and competitors reports?

2.) Does the Non-GAAP numbers provide a reasonable source of reliable information?

3,) Should corporations be REQUIRED to report ALL numbers in accordance with GAAP…even during the quarterly, non-audited venue?

4.) Is there a need to translate complex GAAP based information into more useful financial data?

Answer 1

1.) Does the use of Non-GAAP reports impair the ability to compare prior periods and competitors reports?

GAAP is the short form of Generally Accepted Accounting Principles, which are to be followed uniformly by every business organisation. These GAAP enables all corporations finanacial information to be recorded in a same manner. By doing like that, finaancial stamtents of all corporations can be compared and analysed. In case of any difference in budgeted and acheived or downfall as compared with previous years statments, and also we can estimate how much we have to acheive when compared with our competitors financial information or statments. But it is not possible if Non GAAP reports are used.

So, Yes, use of Non-GAAP reports impair the ability to compare prior periods and competitors reports.

Without following GAAP,reports of different organisations may not be able to compare with one another. Because one accounting rules or principles followed by one corporation may differ form other and it not a scientific procedure to compare such results of different companies.

2.) Does the Non-GAAP numbers provide a reasonable source of reliable information?

The Financial data shall be reilable, then only one can analyse their past business operations. And the source should be reasonalbe source, from which the financial data was obtained. In general Finanacial data collected from the Statments which were prepared by using GAAP rules are reliable. Because, one of the reason is in GAAP Accrual system of accounting is used, which identifies future loss first but it recognises profit only when it actually raised. So, by using GAAP we will be in safe zone and can make stratagies for future to over come the loss. But financial data collected form Non GAAP reports which are non GAAP numbered are not reliable as compared with GAAP reports information.

For Example: All GAAP reports are prepared by following Cost concept under which, all items shall be shown at historical cost, but in non GAAP reports some may follow this concep and some corporations may follow market value concept which differs the data of those Non GAAP reports, that becomes un reliable informartion

So, Non GAAP numbers does not provide a reasonable source of reliable information.

3,) Should corporations be REQUIRED to report ALL numbers in accordance with GAAP…even during the quarterly, non-audited venue?

Yes, all corporations are required to report all numbers in accordance with GAAP... even during the quarterly, non audited venue also. All corporations should enable its users to compare its results with others and for the corporations they should be able to compare its results with previous quarters. Then only in case of downfall those corporations may plan its stratagy to over come those threats. And at the same time it is also required by Law to record all its corporations accounts by using GAAP.

4.) Is there a need to translate complex GAAP based information into more useful financial data?

Yes, some times corporations need to translate complex GAAP based information inot more useful financial data. Because most of the people who use financial data are the investors who holds corporations common stock. They may or may not have in depth knowledge in accounting and financial statment analysis. For example, "profit" recorded in assets side may thought by those people as real profit, but profit recorded under assets side was actually a "loss". It can understandble by the people who have somewhat expert knowledge in analysis of Finanacial statments. So, for corporations it is needed to translate complex GAAP based information inot more useful financial data.