Auditing Non-GAAP Measures: Signaling More Than Intended

• In Event: Audit-related Insight from Novice Judgments

Abstract

Companies regularly issue non-GAAP measures in order to communicate firm-specific information that does not fit within the mold of GAAP (Generally Accepted Accounting Principles) reporting. However, these non-GAAP measures sometimes have little meaning to investors or are even misleading, causing some to question whether auditors should play a role in the reporting of non-GAAP measures. We run an experiment to provide ex-ante evidence on the effect of auditing non-GAAP measures. Specifically, we present participants proxying for nonprofessional investors with a non-GAAP measure that is either useful or less useful for making investment decisions, and either audited or not audited. We find that when participants view a non-GAAP measure that is useful, they appropriately use the non-GAAP measure in their investment-related judgments, regardless of whether the non-GAAP measure is audited. When the non-GAAP measure is less useful, participants should not use the non-GAAP measure in their investment-related judgments. However, we find that while participants appropriately do not use a less useful non-GAAP measure when it is not audited, participants inappropriately use the less useful 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 when the non-GAAP measure is less useful. Overall, our results are consistent with audits of non-GAAP measures signaling more than is intended and have implications for regulators regarding the role of auditors in non-GAAP reporting.

Authors

• Spencer Anderson, University of Illinois

• Jessen L. Hobson, University of Illinois-Urbana-Champaign

• Ryan David Sommerfeldt, University of Illinois-Urbana-Champaign