Sec Scrutiny and the Evolution of Non-Gaap Reporting

The Accounting Review, Vol. 83, No. 1, pp. 157-184, 2008

45 Pages Posted: 3 Jan 2007 Last revised: 10 Mar 2010

See all articles by Kalin S. Kolev

Kalin S. Kolev

City University of New York - Stan Ross Department of Accountancy

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Sarah E. McVay

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2007

Abstract

We empirically examine the effects of intensified scrutiny over non-GAAP reporting on the quality of non-GAAP earnings exclusions. We find that, on average, exclusions are of higher quality (i.e., more transitory) following intervention by the Securities and Exchange Commission (SEC) into non-GAAP reporting. We further find that firms that stopped releasing non-GAAP earnings numbers after the SEC intervention had lower quality exclusions in the pre-intervention period. These results are consistent with the SEC's objectives of improving the quality of non-GAAP earnings figures. However, when we decompose total exclusions into special items and other exclusions, we find evidence that the quality of special items has decreased in the post-intervention period, which suggests that managers adapted to the new disclosure environment by shifting more recurring expenses into special items. This suggests that there may be unintended consequences arising from the heightened scrutiny over non-GAAP reporting.

Keywords: Non-GAAP Earnings, Street Earnings, Pro Forma Earnings, Regulation G, Sarbanes-Oxley

JEL Classification: M41, M43, M45, G38

Suggested Citation

Kolev, Kalin S. and Marquardt, Carol and McVay, Sarah E., Sec Scrutiny and the Evolution of Non-Gaap Reporting (January 1, 2007). The Accounting Review, Vol. 83, No. 1, pp. 157-184, 2008. Available at SSRN: https://ssrn.com/abstract=954768

Kalin S. Kolev

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Carol Marquardt (Contact Author)

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

Sarah E. McVay

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

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