Public and private enforcement of non-GAAP reporting

This study provides evidence on the frequency and effectiveness of public and private enforcement of non-GAAP reporting. Although investors place weight on non-GAAP measures, there is little evidence on the extent and effectiveness of non-GAAP enforcement. The SEC uses comment letters to oversee non-GAAP reporting. While most firms appear to enhance future non-GAAP disclosures after receiving a comment letter, we also find that 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. In addition, non-GAAP enforcement in the form of SEC AAERs and securities class action lawsuits is very rare. However, we find limited evidence of investor harm from managers’ non-GAAP exclusions that are incremental to analysts’ exclusions. This result suggests investors are skeptical of managers’ non-GAAP exclusions.