Closer Look Series: Topics, Issues and Controversies in Corporate Governance, No. CGRP-09, by David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program, And Brian Tayan, MBA ’03, Stanford GSB;
Reliable financial reporting is essential to the proper functioning of capital markets. Investors rely on reported financials to make investment decisions and to evaluate the performance of management and the company over time.
Recent years, however, have seen a proliferation of non-GAAP metrics to supplement official financial statements. Non-GAAP metrics exclude income and balance sheet items that are required under U.S. generally accepted accounting principles. Over half of all companies in the Dow Jones Index make such adjustments when reporting quarterly net income.
What does it say about the quality of the system that so many companies report non-GAAP earnings?
Are these adjustments being made for the benefit of shareholders, or to distort reported results?