Report Finds Heavy Use of Non-GAAP Financial Measures During Pandemic
Public companies have relied heavily on the use of non-GAAP financial measures throughout the COVID-19 pandemic, according to a recent MarketWatch article.
As previously discussed by The Ticker in “Non-GAAP Financial Measures in the Spotlight” and “SEC Issues Guidance on Use of Non-GAAP Financial Measures,” the SEC has repeatedly expressed concern that the pervasive use of non-GAAP financial measures can be misleading to investors, and the regulator has prohibited certain types of disclosures outright and issued numerous comment letters asking companies to justify, revise or eliminate other non-GAAP financial measures from their earnings releases and other public disclosure documents.
Citing a recent report from financial data provider Calcbench, the MarketWatch article argues that “just a few years after a Securities and Exchange Commission crackdown on the overuse of nonstandard accounting metrics, companies in the S&P 500 resumed the practice in droves.” Calcbench examined the 2020 earnings releases of companies in the S&P 500 that reported both GAAP and non-GAAP net income numbers and found that, for the 60 firms with the largest differences between GAAP and non-GAAP net income, non-GAAP net income exceeded GAAP net income by $132.3 billion, representing more than a doubling of reported GAAP net income of $130.7.
“How can anyone say with a straight face that non-GAAP numbers more accurately represent public company earnings?” asked Francine McKenna, an accounting expert quoted in the MarketWatch article. “They’re now more than double the numbers, according to GAAP accounting standards. They often change losses to fake profits. No wonder the stock market is barely aligned with fundamentals,” she said.