The Securities and Exchange Commission (SEC) is mandated toregulate the financial statements of publically traded reportingcorporations. Recently, the SEC has renewed their focuson Non-GAAP reporting issues that are impacting the valuationprocess of regulated companies.
In 2003, the SEC issued Reg G which restricted a companyâsability to deviate from compliance with GAAP regulatorypronouncements. Prior to the issuance of REG G, major reportingissues pertaining to ENRON had resulted in the SEC becoming awareof misleading reports due to Non-GAAP Compliance Issues. Recently,380 out of the S & Pâs 500 reporting entities reporting aDECREASE to GAAP Net Income but an INCREASE to Non-GAAP Net Income.WHY? The primary differences were the result of EXCLUDED EXPENSESon the Non-GAAP Compliant reports. Many reporting entities wereclassifying certain routine, recurring operating expenses asNONRECURRING items. For example: Restructuring Costs and / orImpairment Costs are NOT included in the Non-GAAP reports becausethe management team felt the financial value of the companyâsresults were undermined by these rare costs. This process isallowed by the SECâ¦butâ¦redefining operating expenses asNon-Recurring expenses in an attempt to enhance their financialresults has become a motivating driver to this problematicprocess.
The SEC brought their first âPro Forma Financial Reporting Caseon January 16, 2002 against Trump Hotels & Casinos. The casecentered upon the abuse of Pro Forma earnings which resulted in amisleading Q3 1999 Pro Forma Earnings Release which was inflated toexceed the analysts expectations. In 2009, the SEC brought similarcharges against SafeNet Incâs management team charging them with ascheme aimed at reclassifying recurring operating expenses asnon-recurring (Nov 2009.)
Groupon, in their Initial Public Offering (IPO) filings in 2011stated â¦âthey do not measure themselves in conventional ways.â Theresult was overstated profits that lead to inflated stock valuationprices and the need to restatement prior financial reports. Many inthe business world believe that many companies are focused onreported EBE = Earnings BEFOR Expensesâ¦rather than EBITA = EarningsBefore Interest , Taxes & Amortization.
In an article dated June 29, 2016, the financial reportingcommunity stated that reporting companies âinflated profits by $164Billion using Non-GAAP Measuresâ which clearly indicates theproblem is on-going and material.
Start your research process by reading SEC 100 Gen rules. Youcan also refer to Sarbannes-Oxley (SOX) legislation where thepronouncement âstrongly discourages Non-GAAP reporting. Read theissues the SEC had with Trump Casinos, SafeNet Inc and Groupon. Iwant you to discuss the GAAP vs. Non-GAAP compliance issue andintegrate the following questions into your response.
1.) Does the use of Non-GAAP reports impair the ability tocompare prior periods and competitors reports?
2.) Does the Non-GAAP numbers provide a reasonable source ofreliable information?
3,) Should corporations be REQUIRED to report ALL numbers inaccordance with GAAPâ¦even during the quarterly, non-auditedvenue?
4.) Is there a need to translate complex GAAP based informationinto more useful financial data?
