Auditing Non-GAAP Measures: Signaling More Than Intended

Posted: 2 Sep 2021

See all articles by Spencer B. Anderson

Spencer B. Anderson

University of Illinois at Urbana-Champaign - Department of Accountancy

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Ryan Sommerfeldt

Washington State University

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2021

Abstract

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 should be used when making investment judgments (more informative) or should not be used when making investment judgments (less informative) and is either audited or is not audited. As predicted, 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, also as predicted, 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. Our findings suggest that regulators should exercise caution when it comes to prescribing assurance over non-GAAP measures.

Keywords: non-GAAP measures, audit; expectation gap, attribute substitution, street earnings, pro-forma

Suggested Citation

Anderson, Spencer B. and Hobson, Jessen L. and Sommerfeldt, Ryan, Auditing Non-GAAP Measures: Signaling More Than Intended (July 30, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3904740

Spencer B. Anderson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jessen L. Hobson

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Ryan Sommerfeldt

Washington State University ( email )

Todd Hall 242
Pullman, WA 99164-4729
United States

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