Audits of Non-GAAP Earnings: Evidence from Adjusted EBITDA in Segment Disclosures

49 Pages Posted: 5 Jun 2024

See all articles by Matthew Ege

Matthew Ege

Texas A&M University - Department of Accounting

Antonis Kartapanis

Texas A&M University - Mays Business School

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Date Written: September 23, 2024

Abstract

We provide evidence on an important question to capital markets: “Would subjecting non-GAAP metrics to audit affect the quality of the metrics?” Focusing on instances where adjusted EBITDA is disclosed in firms' segment notes, which subjects the EBITDA metric to audit requirements, we find that the adjustments made when calculating EBITDA are of higher quality when subject to audit. Further tests help rule out concerns that the results are driven by a firm commitment to having high-quality adjusted EBITDA or firms with more informative EBITDA being more likely to use adjusted EBITDA in segment notes. We also find that analysts follow manager-provided adjusted EBITDA more when the measures are audited and that managers disclose audited EBITDA metrics more prominently in their earnings announcements. Overall, our evidence indicates that, at least in the context of our study, the answer to our research question is yes—auditing non-GAAP metrics affects their quality.

Keywords: adjusted EBITDA, non-GAAP, audit

JEL Classification: M41, M42

Suggested Citation

Ege, Matthew and Kartapanis, Antonis and Whipple, Benjamin C., Audits of Non-GAAP Earnings: Evidence from Adjusted EBITDA in Segment Disclosures (September 23, 2024). Available at SSRN: https://ssrn.com/abstract=4852518 or http://dx.doi.org/10.2139/ssrn.4852518

Matthew Ege

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Antonis Kartapanis (Contact Author)

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Benjamin C. Whipple

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
257
Abstract Views
793
Rank
253,065
PlumX Metrics