Still on its soap box over misuses of non-GAAP measures, the Securities and Exchange Commission issued an enforcement action against home security company ADT.
The company agreed to a $100,000 penalty over allegations that it reported non-GAAP accounting metrics more prominently than their GAAP counterparts, which is a violation of Regulation S-K. The SEC flagged the issues in the company’s fourth-quarter and year-end filings for fiscal year 2017 and again in the first-quarter filing of 2018.
Companies are required to follow Generally Accepted Accounting Principles as described in the Accounting Standards Codification and SEC reporting rules when filing their financial statements. SEC rules permit use of individually tailored accounting metrics that companies use to manage their businesses, but within guidelines. Among the guidelines, non-GAAP metrics may not be presented more prominently than their nearest equivalent GAAP metrics.
According to the SEC, ADT reported in its 2017 year-end and fourth-quarter results and in its first-quarter 2018 results three specific metrics more prominently than the GAAP metrics they most closely resemble. Those included the company’s earnings before interest, taxes, depreciation, and amortization, or EBITDA, as well as an adjusted figure for net income, and free cash flow before calling out certain special items. ADT reported EBITDA, for example, which was up 8 percent year-over-year, in headlines and highlights of its earnings releases but buried the company’s net loss under GAAP in the body of the release.
The SEC has been on a mission the past few years to reign in non-GAAP reporting problems, issuing comment letters and new guidance and speaking about it at professional conferences, but it has issued only a handful of regulatory enforcement actions. According to Audit Analytics, the few SEC enforcement actions on non-GAAP reporting have typically involved the added elements of financial restatements or fraud allegations.
The ADT action is the only one the SEC has brought that has not accused the firm of providing misleading metrics, Audit Analytics says. It also falls well after the SEC had taken measures to raise awareness about non-GAAP reporting and to bring companies into compliance ahead of enforcement activity.