Auditing Non-GAAP Measures: Signaling More Than Intended
50 Pages Posted: 27 Jun 2019 Last revised: 20 May 2021
Date Written: May 2021
Many companies regularly disclose non-GAAP performance measures to communicate firm-specific information that does not fit within the mold of GAAP reporting. However, these non-GAAP measures may have low information content or even be misleading to investors. Thus, the question arises of whether auditors should play a larger role in the reporting of non-GAAP measures, which currently are not audited. We run an experiment to provide ex ante evidence on the effect of auditing non-GAAP measures. Specifically, we present investor participants with a non-GAAP measure that is either more informative (should be used when making investment judgments) or less informative (should not be used when making investment judgments) and is either audited or is not audited. We find that, when participants view a non-GAAP measure that is more informative, they appropriately use the non-GAAP measure in their investment-related judgments, regardless of whether the measure is audited. However, we find that, while participants appropriately do not use a less informative non-GAAP measure when it is not audited, participants inappropriately do use the less informative 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. Specifically, our results are consistent with audits of non-GAAP measures signaling more than is intended, evidenced by investors perceiving an audited non-GAAP measure as being useful in their investment decisions when the measure is less informative to them. We also discuss implications for regulators and researchers regarding the role of auditors in non-GAAP reporting.
Keywords: Non-GAAP, Audit, Attribute substitution
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