Auditing Non-GAAP Measures: Signaling More Than Intended

41 Pages Posted: 27 Jun 2019 Last revised: 16 Jul 2019

See all articles by Spencer B. Anderson

Spencer B. Anderson

University of Illinois at Urbana-Champaign - Department of Accountancy

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Ryan Sommerfeldt

University of Illinois at Urbana-Champaign

Date Written: June 2019

Abstract

Companies regularly issue non-GAAP measures in order to communicate firm-specific information that does not fit within the mold of GAAP (Generally Accepted Accounting Principles) reporting. However, these non-GAAP measures sometimes have little meaning to investors or are even misleading, causing some to question whether auditors should play a role in the reporting of non-GAAP measures. We run an experiment to provide ex-ante evidence on the effect of auditing non-GAAP measures. Specifically, we present participants proxying for nonprofessional investors with a non-GAAP measure that is either useful or less useful for making investment decisions, and either audited or not audited. We find that when participants view a non-GAAP measure that is useful, they appropriately use the non-GAAP measure in their investment-related judgments, regardless of whether the non-GAAP measure is audited. When the non-GAAP measure is less useful, participants should not use the non-GAAP measure in their investment-related judgments. However, we find that while participants appropriately do not use a less useful non-GAAP measure when it is not audited, participants inappropriately use the less useful non-GAAP measure in their investment-related judgments when it is audited. Mediation results provide evidence consistent with audits affecting investors’ reliance on non-GAAP measures when the non-GAAP measure is less useful. Overall, our results are consistent with audits of non-GAAP measures signaling more than is intended and have implications for regulators regarding the role of auditors in non-GAAP reporting.

Keywords: Non-GAAP, Audit, Attribute substitution

Suggested Citation

Anderson, Spencer B. and Hobson, Jessen L. and Sommerfeldt, Ryan, Auditing Non-GAAP Measures: Signaling More Than Intended (June 2019). Available at SSRN: https://ssrn.com/abstract=3409386 or http://dx.doi.org/10.2139/ssrn.3409386

Spencer B. Anderson

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jessen L. Hobson

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Ryan Sommerfeldt (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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