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The Role of Auditors in Non-GAAP Financial Measures and Key Performance Indicators: Present and Future

Introduction

Investors and other users of financial information are increasingly consuming information outside of the audited financial statements to inform capital allocation and other decisions. In December 2019, the Center for Audit Quality (CAQ) released a publication, The Role of Auditors in Company Prepared Information: Present and Future, that provides a foundational understanding of the current role of auditors in various types of company-prepared and publicly disclosed information, and how auditors are positioned to help fill existing gaps in enhancing the reliability of decision-useful information.

Typically, public companies in the United States prepare their financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Non-GAAP financial measures provide companies the flexibility to supplement their GAAP results with disclosures presented “through the eyes of management.” Many companies are disclosing these types of measures in their filings with the U.S Securities Exchange Commission (SEC) and other company-prepared and publicly disclosed materials.

Non-GAAP financial measures are used by various stakeholders for several reasons, including valuing companies, determining executive compensation, and as a means of communicating a company’s individual story or business strategy. Similarly, key performance indicators (KPIs) are disclosed by management to provide additional insights into the company’s performance or operations. In times of uncertainty and market volatility, these measures may become increasingly useful to a company’s ability to communicate supplemental information to investors and other stakeholders.

Users of this information should understand the rules and regulations applicable to companies that choose to provide this information to the public and what may impact the utility of this information. In this publication, we provide an overview of what non-GAAP financial measures and KPIs are, how they are used, and how the auditor could play a greater role in this information. We also present key questions audit committee members can ask as they discuss this information with management and auditors, as well as questions investors may want to consider as they use non-GAAP financial measures and KPIs to make decisions.

94%

of S&P 500 companies included at least one non-GAAP financial measure in their earnings releases in the first calendar quarter of 2020.

Source: S&P 500 non-GAAP financial measures statistics were calculated by the CAQ based on data provided by Audit Analytics

About the Center for Audit Quality

The Center for Audit Quality (CAQ) is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high-quality performance by public company auditors; convenes and collaborates with other stakeholders to advance the discussion of critical issues that require action and intervention; and advocates policies and standards that promote public company auditors’ objectivity, effectiveness, and responsiveness to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs.

Please note that this publication is intended as general information and should not be relied on as being definitive or all-inclusive. As with all other CAQ resources, this publication is not authoritative, and readers are urged to refer to relevant rules and standards. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The CAQ makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained herein. The CAQ expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on this material. This publication does not represent an official position of the CAQ, its board, or its members.