In an article for Agenda, Bass, Berry & Sims attorney Tatjana Paterno commented on the comment letters from the Securities and Exchange Commission (SEC) related to non-GAAP measures and what this focus could mean for audit committees. In December 2022, the SEC released several new or revised Compliance & Disclosure Interpretations (C&DIs) regarding the use of non-GAAP measures in SEC filings.

“These [C&DIs] highlighted a renewed focus from the SEC on non-GAAP measures,” Tatjana said. “But even before that, the most frequent topic in comment letters in the past few years was non-GAAP measures.” She added, “Overall, the SEC is focused on transparency and investor protection, and equal or greater prominence fits right in there.”

Tatjana warned, “In the staff’s view, no amount of disclosure can overcome the determination that individual tailored accounting measures are misleading. This is considered the most serious of [non-GAAP] violations. Issuers should be careful about this one.”

When asked about the audit committee’s responsibilities related to non-GAAP financial measures, Tatjana said, “It should not just be management coming up with these metrics, but there should be a process and support system around it where the audit committee understands fully what those measures are and how they are calculated. Audit committees should regularly ask management about the purposes of the non-GAAP measures chosen, the process to calculate those measures, whether the outcome of the measures impact management compensation in any way, and whether the disclosure of these measures balances transparency and compliance with SEC rules.”

The full article, “SEC Zooms In on Non-GAAP in Recent Comment Letters,” was published by Agenda on September 11 and is available online (subscription required).