The Center for Audit Quality (CAQ) has issued guidance for audit committee oversight of non-GAAP financial measures. Since 2015, the SEC has increased its scrutiny of company disclosure of financial performance and condition measures that do not conform to generally accepted accounting principles. See SEC Chair and Chief Accountant are Concerned About the Growing Use of Non-GAAP Financial Measures and Warn that Audit Committees Should Be as Well, April 2016 Update. The CAQ has previously released two other papers to assist audit committees in their oversight of non-GAAP disclosures: Questions on Non-GAAP Measures: A Tool for Audit Committees (June 2016) and Non-GAAP Financial Measures: Continuing the Conversation (December 2016). See CAQ Issues Audit Committee Non-GAAP Oversight Tool, June-July 2016 Update.
The new publication, Non-GAAP Measures: A Roadmap for Audit Committees, is based on roundtable discussions convened by the CAQ in 2017 at which audit committee members, management representatives, investors, securities lawyers, and public company auditors discussed some of the challenges involved in the publication of non-GAAP measures. The CAQ also released a video which includes interviews with audit committee chairs and examples of how audit committees oversee the use of non-GAAP measures.
The CAQ press release announcing the release of the Roadmap highlights six recommendations that emerged from these discussions. The audit committee should:
- Put itself in the shoes of investors when evaluating if the presented non-GAAP measures and related disclosures align with the company’s overall strategy and performance.
- Ask management whether it has an internal policy that provides guidelines for determining how non-GAAP measures are generated, calculated, and presented.
- Discuss with management how the company makes changes to the non-GAAP measures it presents and the rationale for why it would or would not make changes.
- Ask the company to compare or benchmark its non-GAAP measures to its peers.
- Leverage external auditors as a resource when evaluating nonGAAP measures.
- Engage with investors directly or through investor relations to ensure that the presented non-GAAP measures aid investors’ understanding of the company’s performance.
With respect to the second recommendation above, the Roadmap notes that not all companies that utilize non-GAAP measures have a written policy governing how the measures are generated, calculated, and presented, and setting forth the rationale for their use and the adjustments on which they are based. The CAQ advises audit committees of companies that lack such a policy to encourage management to create one. The Roadmap also recommends that audit committees consider making disclosure in the committee’s report concerning this issue:
“[G]iven the current regulatory environment and the fact that nonGAAP measures are important to investors and are central to their decision making, there could be benefits to an audit committee voluntarily disclosing that the company has non- GAAP policies (but not necessarily the relevant details of those policies). Such disclosure could demonstrate to investors the importance of this information to the audit committee and that policies are in place to support the metrics being consistent, transparent, and comparable.”
Comment: The Roadmap states: “The audit committee has an important responsibility on behalf of company shareholders to oversee the financial reporting process and external audit. Given its role, the audit committee can act as a bridge between management and investors, and it can assess management’s reasons for presenting non-GAAP measures and evaluate the sufficiency of the related disclosures. The audit committee can determine whether the measures present a fair and balanced view of the company’s performance.” In light of this responsibility, the suggestion that audit committees make sure that their companies have a written non-GAAP policy is a good one. The policy should be reviewed periodically to make sure it is consistent with company practice.