The Use of Non-GAAP Financial Measures by Dow Jones Industrial Average Companies

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Abstract

This paper explores the use of non-GAAP financial measures by a group of U.S. publicly-traded companies, namely the 30 companies included in the Dow Jones Industrial Average (DJIA). Non-GAAP financial measures, as defined in the Securities and Exchange Commission (SEC) Rule 33-8176, are
Numerical measure[s] of a registrant’s historical or future financial performance, financial position or cash flows that includes amounts that are not part of the most directly comparable GAAP [generally accepted accounting principle] measure or excludes amounts that are part of the most directly comparable GAAP measure.
There has been much concern and debate by both the accounting and financial communities over the use of non-GAAP measures and the issues they may cause. Some believe that such measures are misleading to investors, while, at the same time, companies believe that non-GAAP measures present a better representation of their financial position than do GAAP measures.
This paper reviews the historical use of non-GAAP measures and the relevant literature, presents the pros and cons for their use, presents an overview of the SEC’s current reporting and disclosure requirements, and discusses the SEC’s concerns and several recent enforcement cases, It also concludes by analyzing the actual usage of non-GAAP measures by the DJIA companies and by presenting recommendations for ensuring the ethical use of such measures.

Authors

• Sarah Vaughan, SCSU

• Kevin Feeney, Southern Connecticut State University