Board Directors Split on Non-GAAP Reporting

BY Michael Cohn, Accounting Today

Board members at public companies largely favor the use of non-GAAP measures but differ on disclosures of how they’re being used, according to a new survey.

The survey, by BDO USA LLP, asked 160 corporate directors of public company boards about their opinions on financial reporting, executive compensation, risk management and other issues. When they were asked if regulators should provide additional guidance on the use of non-GAAP measures in financial statements, the directors appeared to be evenly split, with 51 percent for the guidance and 49 percent against it.

However, a 67 percent majority indicated they believe auditor involvement would provide higher investor confidence in the reporting of non-GAAP measures. Overall, 70 percent of the board members surveyed believe there are so many disclosures in financial statements today, it is difficult to decide which information is most important.

Of those in favor of additional guidance on non-GAAP measures, 46 percent identified EBITDA as the metric that gives them the greatest concern. That was followed by restructuring costs (14 percent), stock-based compensation (13 percent) and acquisition integration costs (13 percent) cited as areas of concern.

Sixty-seven percent of the board members believe auditor involvement would provide higher investor confidence in the reporting of non-GAAP measures, compared to 33 percent who do not feel it will have an impact.

Despite criticism that non-GAAP figures in combination with compensation metrics help executives draw larger pay packages, 74 percent of the board directors polled said they are opposed to prohibiting the use of non-GAAP measures in executive compensation calculations.

When asked to identify the most meaningful financial reporting disclosures for investors, 49 percent of the board members polled cited critical audit matters that involve complex judgements on material issues. The next most cited disclosures were non-GAAP financial measures that provide supplemental information on a business’s performance (29 percent) and how the organization is addressing risk management (19 percent).

Seventy-one percent of the board members polled indicated they believe disclosures regarding the audit committee’s oversight of the external auditor provide value to current and potential shareholders. On the other hand, only 24 percent of the directors believe disclosures regarding sustainability matters such as climate change and corporate social responsibility are important to investors’ understanding of a company’s business and help them make more informed decisions.