Public and private enforcement of non-GAAP reporting

This study provides initial evidence on public and private enforcement of non-GAAP reporting. Although investors place significant weight on non-GAAP measures, there is little evidence on non-GAAP enforcement as researchers generally focus on GAAP-related enforcement. The SEC uses comment letters as its primary oversight method, but the effectiveness of this approach is questionable. Firms that receive non-GAAP comment letters are more likely than control firms to receive future non-GAAP comment letters, with the same comments often repeated. Raising further concern about non-GAAP comment letters, firms issue longer, harder to read, and more redundant earnings announcements after receiving such comment letters. In addition, serious non-GAAP enforcement is very rare. Overall, the pursuit of serious non-GAAP enforcement appears to be unattractive to the SEC and lawyers. Finally, alleged non-GAAP issues of firms subject to serious enforcement do not align with academic measures of non-GAAP aggressiveness, calling into question academic proxies for identifying serious non-GAAP aggressiveness.