Finance professionals wary over today’s non-GAAP reporting, say experts 

“CPAs are the professionals that should understand the ambiguities with the preparation and presentation of financial statements and not be comfortable when there are discrepancies,” says CPA Anthony Scilipoti (Getty Images/Maskot)

It’s splashed across headlines. The Ubers, the WeWorks, the Lyfts, with soaring company values, often alongside IPOs, only to see them plummet by billions of dollars months later.

Uber Technologies Inc.’s shares hit a record low in early November to $25.58 a share from $45 a share at the time of its IPO. Meanwhile, its current CEO spends millions on shares, as its former CEO cashes out.

After a failed IPO in September, WeWork’s value dipped to $8 billion from $44.7 billion in August—even with a $9.5 billion rescue from tech investor, Softbank Group—prompting a shareholder lawsuit, CEO resignation and 2,400 job cuts globally

Then there’s Lyft. The Uber-Ride rival had an adjusted net loss of $121.6 million in the third quarter of this year, compared with $245.3 million a year ago. Shares since went up as much as 5.32 per cent after it announced a partnership with ride-hailing company, Gett.

The list goes on.

These gig economy prodigies, or “unicorns” as they are also known, evaluate their worth “creatively”, argue critics, measuring their performance using new profit metrics––or non-GAAP (Generally Accepted Accounting Principles) measures in accounting lingo––that make companies look better to investors, while excluding key financials. 

From a CPA perspective, there is a responsibility to uphold the profession regardless of what role you play, says Anthony Scilipoti, CPA, president and CEO of Veritas Investment Research Corporation.

“CPAs are the professionals that should understand the ambiguities with the preparation and presentation of financial statements and not be comfortable when there are discrepancies,” he says.“We all have a vested interest given our role as professionals in financial information, we have to take that seriously.”

BEHIND THE PRACTICE

The practice isn’t new. Others including Groupon Inc., Yahoo Inc., even Canada’s very own Blackberry, are doing it. Back in the dot-com era, chief accountant for the U.S. Securities Exchange Commission, Lynn Turner, called it out as ‘EBS earnings, or ‘Everything but Bad Stuff’, citing key issues as reporting earnings before marketing costs or losses from product lines, unaligned cash earnings and cash flow and ignoring amortization.

The problem is these self-prescribed measures often exclude expenses that can amount to millions of dollars, critics say. Uber’s “core platform adjusted net revenue”, for example, removes recurring costs that exist when expanding into competitive markets; WeWork’s “community-adjusted Ebitda” excludes company-wide expenses; and Groupon’s “adjusted consolidated segment operating income” (ACSOI) ignores key operating expenses.   

The companies argue that these measurements give a more accurate assessment of their growth potential. But investors are becoming increasingly wary, and regulators and standard setters are paying attention.   

“[Companies] are strategic because they are able to use those metrics, and calculate those metrics that they see are best representative of the performance that they would like to communicate,” says Scilipoti.

“Because there are no standards…companies will do all too often what is in their best interest, and the problem is it may not always align with the best interest of the investor.” 

TAKING ACTION

Using non-GAAP measures to evaluate a company’s performance is not the real issue, explains Linda Mezon, FCPA, FCA, CPA (MI), CGMA,, chair of the Accounting Standards Board (AcSB). It’s reasonable when there are transparent disclosures, she says, for a company to include non-GAAP, as well as non-financial measures—such as, how it’s managed, serves its customers, it’s corporate culture etc.—to give investors a broader picture of what the company is about. 

“GAAP accounting standards aren’t necessarily the best vehicle for all of those nuances…You have to ask yourself: are all different types of industries going to be able to apply the same standard and tell their story?” she says. 

“I don’t think there is anything inherently evil in these companies wanting to tell their story however, being the imperfect world that it is, managers will always try to put their best face forward on these things.” 

Mezon, therefore, stresses the importance of quality reporting and having controls in place over non-GAAP and non-financial measures, including oversight, governance, leadership certification and independent review, to prevent the presentation of misleading, or inaccurate, information. 

“You have all those things that make the GAAP numbers what they are. You have internal controls. You have people review the numbers,” she says. “All that quality and oversight should apply to the process you put in place to report these other non-GAAP things.”

It’s the premise behind the AcSB’s report, Framework for Reporting Performance Measures, released in December 2018, which included consultations with over 300 Canadian organizations from varied sectors and 50 standard setters from around the world reflecting on the processes in place for financial and non-financial reporting. The report identifies key challenges around performance measure practices and guidelines for moving forward. 

“Our framework says…here’s what you should be thinking about when you produce those numbers and you know people are relying on them,” Mezon says. “Instead of ‘thou shalt through a standard’, we are saying this is important, and as a standard setter, we are challenging you to make sure you have quality in your performance measures.” 

LOOKING FORWARD

Over the long-term, Mezon says this is a global issue, which requires a united effort from standard setters, regulators, investors, advisers etc. around the world, instead of the compartmentalized effort currently at play.  Europe, for example, she adds, is more focused on sustainable reporting, than non-GAAP reporting. 

“We are all kind of putting our toe in the water but it’s not a coordinated effort. If we could work in a more cohesive fashion, we would be bringing everybody along…and give users more comparable information,” she says. “Everybody thinks ‘well this is my little part of the world, so I’m going to do my little part.’” 

Though encouraged by progress, Scilipoti believes we are a long way off from finding a solution to this practice—that is non-GAAP reporting—which he believes lacks consistency and proper enforcement. He says without stringent regulatory enforcement that stops inconsistent financial reporting, companies will continue to divulge non-financial information as best serves their interests. 

“At the same time, the investor needs to wake up to this and recognize that investing is not simple. Reported financial information must be scrutinized,” he says. 

YOUR NEXT STOP

Find out more about what’s behind AcSB’s report, Framework for Reporting Performance Measures, which offers guidance and insight into more accurate and meaningful financial reporting using both non-GAAP and non-financial measures.