On December 5, 2016, SEC Chief Accountant Wesley R. Bricker, speaking at the American Institute of Certified Public Accountants Conference in Washington, D.C., emphasized the importance of high quality financial reporting to the U.S. capital markets. In the area of non-GAAP reporting, Mr. Bricker noted that since the release of the new Compliance and Disclosure Interpretations on Non-GAAP Financial Measures (the "C&DIs"), the staff of both the SEC's Division of Corporation Finance and the Office of the Chief Accountant (the "Staffs") have engaged with registrants and their advisors on the topic and have noted substantial progress being made in addressing a number of problematic practices. However, the Staffs have observed that more needs to be done, particularly in the area of evaluating the appropriateness of the use of non-GAAP financial measures and their prominence, as well as the effectiveness of disclosure controls and procedures.
Mr. Bricker focused particularly on the important "critical gatekeeper" role audit committee members play in ensuring credible, reliable financial reporting, as well as compliance with the C&DIs. Highlights include the following:
- Good reporting practices place a premium on audit committee member understanding of the company's non-GAAP policies, procedures, and controls.
- Audit committee members should seek to understand management's judgments in the design, preparation and presentation of non-GAAP measures and how those measures might differ from approaches followed by other companies. These discussions will require an understanding of the company's business model and how it is managed.
- It is important to keep in mind that businesses operate in uncertain environments. If non-GAAP adjustments replace that business reality with smooth earnings over time, accelerate unearned revenues, or defer incurred expenses, those adjustments and disclosures should be evaluated closely under the C&DIs.
- The oversight of management's activities is crucial for
investor protection, and it is important for both auditors and
audit committees to keep and maintain the direct relationship they
share. The following questions from audit committee members to
their external auditor may be helpful in generating a dialogue:
- If you as the auditor were in management's shoes and solely responsible for preparation of the company's financial statements, would they have in any way been prepared differently?
- If you as the auditor were in an investor's shoes, would you believe that you have received the information essential to understanding the company's financial position and performance?
- Is the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO's shoes?
- Are there any recommendations that you as the auditor have made and management has not followed?
- Audit committees should not underestimate the importance of their role overseeing the external auditor as auditors are accountable to the board of directors through the audit committee and not to management.
Mr. Bricker's speech is available at: https://www.sec.gov/news/speech/keynote-address-2016-aicpa-conference-working-together.html.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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