Keywords

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

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.

Original Publication Citation

Anderson, S.B., Hobson, J.L. and Sommerfeldt, R.D. (2022), Auditing Non-GAAP Measures: Signaling More Than Intended*. Contemp Account Res, 39: 577-606. https://doi.org/10.1111/1911-3846.12724

Document Type

Peer-Reviewed Article

Publication Date

2021-08-16

Publisher

Contemporary Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Assistant Professor

Download

Included in

Accounting Commons

Share

COinS