Navigating SEC Scrutiny of Non-GAAP Financial Measures: Compliance Risks and Best Practices

According to an article by Pillsbury Law, the Securities and Exchange Commission (SEC) has ramped up its scrutiny of non-GAAP financial measures, which public companies often use to supplement their Generally Accepted Accounting Principles (GAAP) disclosures. 

These non-GAAP financial measures can provide additional insights into a company’s performance, but improper adjustments or misleading presentations can lead to significant legal risks, including fines and penalties. Since 2023, SEC enforcement actions related to non-GAAP measures have resulted in over $20 million in fines. The SEC enforces compliance through Regulation G, Item 10(e) of Regulation S-K and related guidance, and violations may lead to civil penalties or criminal charges.

Case law shows the SEC’s increasing vigilance. For instance, according to the article, DXC Technology was fined $8 million for misstating non-GAAP financial measures by improperly classifying certain expenses. In comparison, Newell Brands faced a $12.5 million penalty for misleading investors with non-GAAP core sales figures. In both cases, the SEC charged the companies under multiple provisions, including Section 17 of the Securities Act and Exchange Act rules related to accurate and complete reporting.

SEC comment letters on recent disclosures highlight specific challenges. Madison Square Garden and Commercial Metals, for example, faced scrutiny for adjustments in non-GAAP measures that were seen as inconsistent with SEC rules, leading to required revisions. These cases illustrate the SEC’s focus on the integrity of non-GAAP financial measure disclosures.

To mitigate risks, the article notes that companies should ensure adjustments are well-documented, consistent, and clearly reconciled with GAAP figures. Establishing comprehensive internal controls, adhering to SEC guidelines, and conducting periodic reviews of non-GAAP disclosures can help minimize exposure to regulatory action. Companies should also be prepared for the SEC’s ongoing scrutiny of their non-GAAP practices.