Tension continues over proper use and especially prominence of non-GAAP accounting measures compared with GAAP measures, although the focus now seems to have shifted to the most egregious violations with possible enforcement actions.

At the national conference of the American Institute of Certified Public Accountants, staff from the Securities and Exchange Commission indicated companies have made improvements in their adherence to the guidelines around how they can use non-GAAP measures to explain the business to investors. “Over the years, some of the practices that had developed became troubling,” said Mark Kronforst, chief accountant in the Division of Corporation Finance at SEC. “Particularly with respect to prominence, that was the most widespread issue we addressed. Still, SEC’s Michael Maloney, chief accountant in enforcement, said the enforcement staff is looking at some non-GAAP abuses as potential targets for disciplinary action.

SEC rules do not prohibit companies from reporting non-GAAP information to investors, but they provide a number of guidelines meant to assure the non-GAAP data is not presented in a way that would mislead investors. The SEC reiterated those guidelines in Compliance & Disclosure Interpretations in May 2016 as part of its effort to shore up what it regarded as abusive treatment.

One key requirement is that non-GAAP data cannot be presented in a way that is more prominent than GAAP data. That effectively means GAAP information must be given more prominence than non-GAAP, said Martin Dunn, a partner with law firm Morrison & Foerster. “It’s impossible to give the measures equal prominence,” he said at the conference. “One has to go first.”

Kronforst said the SEC is trying to take a “common-sense approach” to consideration of prominence issues. “Things had gotten pretty bad,” he said. While some SEC comments on individual prominence issues may have seemed “trivial,” he said, the effect of adding up many such instances became significant. “No one has just one,” he said. “When you put those together, and companies made those revisions, it matters. Those earnings releases look a lot different.”

The issue also crops up in reconciliation of non-GAAP numbers to their closest GAAP counterpart, which is also required in SEC rules around presentation of non-GAAP information. If you’re reconciling one number to another, which number should be presented first? The GAAP number, said Kronforst.

Some may consider that confusing when considering how reconciliations work, but prominence matters, said Kronforst. “We are requesting companies put GAAP at the top of the earnings release,” he said.

In a recent nearly 90-page roadmap to proper use of non-GAAP measures, Deloitte says non-GAAP measures ranked third in the 12 months ending in June on the list of topics drawing most frequent comment from Corporation Finance as part of its filing review process. For the second quarter of 2016, non-GAAP comments ranked second behind all sections of management discussion and analysis combined, the firm reports.

“Over the next year, we expect the number of SEC comments to continue to remain high and even increase until the guidance in the updated C&DIs has been fully incorporated into practice,” Deloitte says. Accounting experts are advising companies to assure they have strong controls around their use of non-GAAP measures to assure they are used within acceptable parameters. The Center for Audit Quality also recently issued a paper to help foster continued dialogue.

Kronforst says the SEC staff is finding the problem is mostly fixed. “We’re finding with non-GAAP that the vast majority of companies are just fine,” he said. “They are using them appropriately.” The focus now is on a relatively small number of outliers, he said.

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