Minding the GAAP: An Analysis of Historical Non-GAAP (Mis-)Use

Abstract

The SEC issued guidance in May 2016 on registrant’s presentation of non-GAAP data, which suggests it thought that historical corporate earnings reports employed at least some misleading non-GAAP earnings figures. Given the contemporary relevance of this accounting issue to future earnings reports and the investors that interpret and act on them, I worked to uncover to what extent technology companies (as a subset for all companies that frequently employ non-GAAP measures) used misleading non-GAAP metrics over the last ten years. I find that non-GAAP use was systematic and widespread over the last ten years in my sample of 25 companies, with the magnitude of this abuse increasing as time transpired. Non-GAAP addbacks were on average 94.6% of GAAP earnings, meaning that non-GAAP earnings were almost double their GAAP counterparts. In addition, most companies employed similar types of exclusions, including but not limited to misleading share-based compensation and individually tailored addbacks. I argue that in the future, and in addition to its May 2016 non-GAAP guidance, the SEC should increase comparability between similar companies and reduce the presence of misleading non-GAAP figures by prohibiting vague or business operations-related exclusions. For this research I use a definition of “misleading” developed by Deloitte in response to the SEC’s May 2016 non-GAAP guidance to assess the total level of non-GAAP misuse in my sample companies.