The auditor's role
What is the auditor’s role with respect to this information?
In short, the external auditor generally has limited responsibility for non-GAAP financial measures and KPIs. Professional standards require auditors to read the other information in documents containing the audited financial statements and consider whether such information or the manner of its presentation is materially inconsistent with information appearing in the audited financial statements or contains a material misstatement of fact. Note, however, that even if the non-GAAP financial measures or KPIs are included in the same document as the financial statements, reading and considering information involves substantially less work than an audit. Further, non-GAAP financial measures and KPIs are often included in documents that do not contain audited financial statements, such as company earnings releases or analyst presentations. When conducting an audit of the financial statements or internal controls, the auditor provides no assurance related to information included in earnings releases and analyst presentations and typically performs no procedures related to such information.
Where could auditors play a greater role in this information?
In their public interest role, public company auditors play a role in the flow of comparable and reliable information for decision making. Having auditors associated with non-GAAP financial measures and KPIs could bring discipline to management’s process and help enhance the trust and confidence in such information by all stakeholders in the reporting ecosystem, including investors and audit committee members. Separate from the financial statement and ICFR audits, external auditors could be engaged to perform certain procedures related to non-GAAP financial measures or KPIs. For example, auditors could be engaged to perform attestation services to help audit committees execute their oversight of non-GAAP financial measures or KPIs by assessing the consistency of the calculations, reviewing the calculation inputs, and confirming the calculations are in accordance with any existing company policies. These services could cover all non-GAAP financial measures and KPIs or select measures or metrics that management or the audit committee deems to be most critical (e.g., non-GAAP financial measures that are used to determine executive compensation). Auditors also could perform a compliance examination on whether the company complied with SEC rules and regulations related to non-GAAP financial measures and KPIs that are publicly disclosed. Additionally, auditors could be engaged to perform control testing related to the preparation and disclosure of non-GAAP financial measures or KPIs. Auditor association signals to stakeholders the importance of the information being reported.While the requirements are limited for auditor involvement in non-GAAP financial measures and KPIs, audit committees and management may consider leveraging the external auditors as a resource when evaluating non-GAAP financial measures or KPIs.
W A T C H
Profession in Focus: Non-GAAP and COVID-19
On this edition of Profession in Focus, the CAQ’s Dennis McGowan, Senior Director, Professional Practice, sits down with Todd Castagno, Executive Director, Research, Morgan Stanley and Steven Jacobs, Partner, Americas Director, SEC Regulatory Matters and Capital Markets, EY to discuss non-GAAP considerations in the COVID-19 environment and share related insights as companies and investors prepare for the Q2 2020 reporting cycle.