Anyone have an opinion on non-GAAP measures that differ materially from actual financial statements? Is this ethical?
In the U.S., it is a a generally accepted practice to include in a company’s income reporting a report that does not conform to GAAP account principles. These reports are called non-GAAP reports. They include factors that companies believe better describe the results of their operations and finances, and they are commonly used by investors to evaluate a company’s performance. Companies use non-GAAP reports to supplement GAAP reports which are often standardized to particular industries. Non-GAAP reports may include a prediction of a company’s future financial performance.
The usage of and reliability of the financial reporting is seriously impacted by the use of non-GAAP reporting measures. Companies can turn poor GAAP earning reports into good non-GAAP earning reports by using their own performance measures. These measures can be modified to provide reports that are unethical in that that they misrepresent a companies earnings and potential. Non-GAAP reports should be severely curtailed, and permitted only in extraordinary circumstances when GAAP reports cannot accurately reflect a company’s financial reality. In such circumstances, companies should have to show that there are extraordinary conditions that merit the use of non-GAAP reports in order to avoid misleading investors. The current prevalent use of non-GAAP reports provides an opaque and often inaccurate basis upon which investors and shareholders make decisions. Without having to demonstrate that extraordinary circumstances merit their use, non-GAAP reports are unethical because they are often not truthful.
References
Jennings, M. M. "Ethics and non-gaap financial reporting." Interntal Auditing Bost Warren Gorham and Lamont Incorporated- 18.6 (2003): 37-40.
