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Audit Committee Involvement with non-GAAP Measures

Lou Rohman, vice president of XBRL Services, Merrill Corporation | August 07, 2018

In his remarks to the 2018 Baruch College Financial Reporting Conference, SEC Chief Accountant Wes Bricker emphasized the importance of audit committees in the reporting of non-GAAP financial measures.

Bricker stated that non-GAAP measures can provide useful information, but there is a need to prevent mischief with those measures. He emphasized that the audit committee can play a key role in understanding how management uses non-GAAP measures to monitor results, and how that information can be used to supplement GAAP financial statements in a company’s reporting.

How Well Does the Audit Committee Understand non-GAAP Measures?

Bricker’s speech should trigger SEC reporting companies to ask themselves … how well does the audit committee really understand the non-GAAP measures that are in its external financial reporting? The answer is a clear reflection of the strength of the company’s compliance and reporting culture. While the audit committee isn’t seen as integral to the creation or reporting of non-GAAP measures, the extent to which the audit committee understands the non-GAAP measures is very important.

According to Bricker, “Audit committees that clearly understand non-GAAP measures presented to the public – and who take the time and effort in their financial reporting oversight role to review with management the preparation, presentation, and integrity of those metrics – are an indicator of a strong compliance and reporting culture.”

Audit committees should consider the following:

  • Closely reviewing non-GAAP measures to develop a fuller understanding of how management evaluates performance.
  • Ensuring that non-GAAP measures are consistently prepared and reported from period to period.
  • Reviewing the disclosure policies related to these measures with management to ensure integrity.

The oversight role of the audit committee can significantly enhance the company’s compliance and reporting culture and the quality of its non-GAAP disclosures.

You can read Wes Bricker’s full remarks here.

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