Bringing order to non-GAAP financial measures: SEC sues to enforce “equal-or-greater-prominence” requirement

Abstract

Purpose

This article examines the first action by the US Securities and Exchange Commission to enforce the “equal-or-greater-prominence” requirement of its rules governing the presentation by SEC-reporting companies, in their SEC filings and earnings releases, of financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

Design/methodology/approach

This article provides an in-depth analysis of the equal-or-greater-prominence rule and the SEC’s enforcement posture in the context of the SEC’s concern that some companies present non-GAAP financial measures in a manner that inappropriately gives the non-GAAP measures greater authority than the comparable GAAP financial measures.

Findings

Although the appropriate use of non-GAAP financial measures can enhance investor understanding of a company’s business and operating results, investors could be misled about the company’s GAAP results by disclosures that unduly highlight non-GAAP measures. The SEC’s enforcement action signals a focus on the manner in which companies present non-GAAP financial measures as well as on how they calculate the measures.

Originality/value

This article provides expert guidance on a major SEC disclosure requirement from an experienced securities lawyer.

Citation

Parrino, R.J. (2019), "Bringing order to non-GAAP financial measures: SEC sues to enforce “equal-or-greater-prominence” requirement", Journal of Investment Compliance, Vol. 20 No. 4, pp. 51-57. https://doi.org/10.1108/JOIC-08-2019-0052