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Learning from the Current Research on Non-GAAP Financial Measures

The CPA journal (1975), 2019-07, Vol.89 (7), p.32-37

COPYRIGHT 2019 New York State Society of Certified Public Accountants ;ISSN: 0732-8435

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  • Title:
    Learning from the Current Research on Non-GAAP Financial Measures
  • Author: Zhang, Jian
  • Subjects: Accountants ; Accounting departments ; Accounting firms ; Accounting procedures ; Accounting standards ; Annual reports ; Audited financial statements ; Auditing standards ; Auditors ; Audits ; Business metrics ; Compliance ; CPAs ; Earnings per share ; Financial performance ; Financial reporting ; History ; Investors ; Laws, regulations and rules ; Popularity ; SEC regulations
  • Is Part Of: The CPA journal (1975), 2019-07, Vol.89 (7), p.32-37
  • Description: According to a report by Audit Analytics, 72% of S&P 500 companies reported adjusted earnings per share (EPS), 71% reported adjusted income, 28% reported adjusted cash flow, and 20% reported earnings before interest, taxes, depreciation, and amortization (EBITDA)/adjusted EBITDA ("Trends in Non-GAAP Disclosures," Dec. 1, 2015). According to Asher Curtis et al., approximately onehalf of businesses with one-time gains report non-GAAP earnings in a manner that easily allows investors to assess operating performance without the gain ("The Use of Adjusted Earnings in Performance Evaluation," working paper, updated May 2018, http://bit.ly/2WFaT0f). Examples include the following: * Analysts, who are viewed as more sophisticated investors, react to non-GAAP performance measures when revising their future earnings forecasts, but are more skeptical than investors of potentially misleading earnings exclusions. * Short sellers, who are also deemed informed parties, trade as if non-GAAP earnings disclosures are a signal of lower reporting quality and future underperformance. * Retail investors, who are viewed as less sophisticated, trade significantly more when non-GAAP information is present in the press release compared to more sophisticated institutional investors. Related studies show a strong association between compensation incentives and managers' propensity to disclose non-GAAP numbers to external stakeholders. [...]the form of executive compensation can influence managers to have a short- or long-term focus on non-GAAP disclosure, as indicated by the aggressiveness of their non-GAAP reporting practices.
  • Publisher: New York: New York State Society of Certified Public Accountants
  • Language: English
  • Identifier: ISSN: 0732-8435
  • Source: ProQuest Central
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