SEC Moves to Enforce “Equal or Greater Prominence” in Financial Disclosures Containing Non-GAAP Information
January 24, 2019 | In December 2018, the Securities and Exchange Commission (SEC) announced it had entered into a settlement with ADT Inc. after finding the company had emphasized non-GAAP financial measures above comparable GAAP measures in two earnings releases. The Commission imposed a $100,000 fine for violation of Section 13(a) of the Securities Exchange Act of 1934, which, through application of Regulation S-K, requires GAAP financial measures to have “equal or greater prominence” as non-GAAP information within a company’s filings.
Public companies often include non-GAAP financial information in their earnings reports and operational results. Non-GAAP financial figures – such as earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA) – can be beneficial in sharing a comprehensive picture of company performance with investors and shareholders. However, SEC issued guidance requires companies to a) reconcile GAAP and non-GAAP disclosures; and b) disclose its rationale for presenting non-GAAP figures. Further, Item 10(e) of Regulation S-K requires that comparable GAAP information be presented with “equal or greater prominence” as non-GAAP information.
The ADT settlement signals a turning point for SEC enforcement of the “equal or greater prominence” measure. In the past, the Commission has typically used comment letters to address noncompliance related to non-GAAP disclosures. Now, it appears, the SEC is prepared to bring enforcement actions – up to and including fines – to companies who fail to meet disclosure standards.
The recent settlement should serve as a reminder for companies to review the SEC-issued guidance on non-GAAP disclosures and consider how the guidance may apply to other reporting and compliance efforts, as well.
The complete ruling can be found here.