Public and private enforcement of non-GAAP reporting

Abstract

This study provides initial evidence on public and private enforcement of non-GAAP reporting. Although investors place weight on non-GAAP measures, there is little evidence on non-GAAP enforcement because researchers primarily focus on GAAP-related enforcement. Further, the SEC uses comment letters to oversee non-GAAP reporting, but the effectiveness of this approach is questionable. Firms that receive non-GAAP comment letters are more likely than control firms to receive future non-GAAP comment letters, with the same comments often repeated. Raising further concern about non-GAAP comment letters, firms issue longer, harder to read, and more redundant earnings announcements after receiving such comment letters. Serious non-GAAP enforcement is also very rare. Overall, the pursuit of serious non-GAAP enforcement appears to be unattractive to the SEC and lawyers. Finally, alleged non-GAAP issues of firms subject to serious enforcement do not align with academic measures of non-GAAP aggressiveness, calling into question academic proxies for serious non-GAAP aggressiveness.

Keywords: Non-GAAP Reporting; Securities Class Actions; Litigation; SEC Enforcement

JEL Classification: G30, K22, K41, M41