Audit Analytics recently released its “big picture” review of SEC comment letter activity for the first six months of 2016. The SEC issued 2,491 comment letters to 808 reporting companies in the first six months of 2016, a considerable decline compared to 3,166 and 4,348 letters filed in the first six months of 2015 and 2014, respectively.

Non-GAAP measures have become the new top area of concern, with 16.4 percent of all letters containing at least one non-GAAP comment, as compared to 8.9 percent in the first six months of 2015. This increase was expected, as the SEC released guidance on non-GAAP reporting in its May 2016 Compliance & Disclosure Interpretations and has indicated in recent speeches that it is paying close attention to the excessive or misleading use of custom metrics.

Additionally, a large number of comments involved the review of earnings transcripts, presentation materials or corporate websites, rather than focusing mainly on SEC filings. Comments relating to fair value measurement, the valuation of long-lived assets and goodwill, tax-related topics, and revenue recognition were also at the top of the list.

In addition to its review of SEC comment letters, Audit Analytics reviewed the first batch of SEC comment letters received following the SEC’s May 2016 release of its non-GAAP reporting guidance.

The analysis covered the 1,426 comment letters issued to 479 companies between July 1 and Oct. 31, 2016. Over 40 percent of the companies received letters with at least one non-GAAP comment, most of which were related to filings from the first half of 2016. Almost half of the non-GAAP comments related to the following four issues:

  • undue prominence of non-GAAP measurements in earnings reports;
  • net of tax presentation;
  • exclusion of normal, recurring or cash operating expenses; and
  • individually tailored recognition and measurement methods.