The reporting of non-GAAP measures, such as adjusted EBITDA or adjusted earnings per share, in companies' public filings and news releases has increased steadily over the past few decades and is currently at a historic high. To address concerns regarding the use of non-GAAP measures to mislead investors, the U.S. Securities and Exchange Commission (SEC) issued Compliance & Disclosure Interpretations (C&DIs) in May 2016 as a guide for companies to effectively disclose non-GAAP measures. These C&DIs have also served as a framework for the SEC as it issues letters to companies noting specific concerns with disclosures of this type of information.
In a new Law360 article, Brattle Principal Adoria Lim and Associate Chi Cheng studied the correspondence between numerous companies and the SEC to identify and categorize the SEC's hot buttons that may lead to enforcement actions, including litigation. Their article highlights how and when companies should disclose non-GAAP measures to avoid both SEC attention and sources of other potential litigation, such as securities class actions. Their analysis finds that the SEC frequently targets disclosures of adjusted EBITDA and adjusted earnings. Further, in addition to evaluating the purpose of disclosing non-GAAP measures, the SEC is often focused on ensuring that comparable GAAP measures are presented with greater or equal prominence.
Lim and Cheng conclude that it can still be valuable to include non-GAAP measures in financial reports, but there are specific ways to disclose them to avoid SEC scrutiny or litigation.
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