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Non-GAAP Disclosure Controls and Procedures

    Client Alerts
  • August 29, 2016

It seems that everyone is focused on non-GAAP financial measures these days, including the SEC. As has been exhaustively reported, SEC Chair Mary Jo White fired the first shot across public company bows back in December 2015, stating that “[b]y some indications,…non-GAAP measures are used extensively and, in some instances, may be a source of confusion.” She was soon backed up by statements from PCAOB Chair James R. Doty, SEC Commissioner Kara M. Stein, SEC Chief Accountant James Schnurr and a host of others. (See this Doug’s Note.) Then, in May 2016, the Division of Corporation Finance issued 12 new or updated Compliance and Disclosure Interpretations dealing with the use of non-GAAP financial measures.

Since May, companies have spent a lot of time analyzing the new C&DIs and, in many cases, modifying their non-GAAP disclosures in order to comply. It is important to remember, however, that non-GAAP reporting is not just of interest to company finance departments focused on internal controls over financial reporting. The C&DIs’ general emphasis on avoiding misleading or manipulative disclosures also highlights the importance of ensuring that disclosure controls and procedures also are kept up to date.

A DC&P refresher…

Securities Exchange Act Rules 13a-15(e) and 15d-15(e) define DC&P as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act…is recorded, processed, summarized and reported, within the time periods specified by the Commission’s rule and forms.” DC&P must ensure that such information is communicated to the decision makers “as appropriate to allow timely decisions regarding required disclosure.”

DC&P is a much broader concept than ICFR, which focuses on recordkeeping, preparation of financial statements and financial reporting. Therefore, limiting attention to ICFR will not necessarily result in full compliance with the SEC’s non-GAAP rules and related interpretations.

Remember also that each quarter companies must disclose in their Form 10-Ks and 10-Qs that they carried out an evaluation of the effectiveness of their DC&P and that, based upon that evaluation, CEO and CFO each concluded that DC&P was effective. And, of course, the CEO and CFO provide more detailed DC&P statements in their Sarbanes-Oxley certifications.

Action steps…

While the finance department, audit committee and outside auditors are now highly focused on the accuracy of non-GAAP financial measures and compliance with the letter of the new C&DIs for purposes of ICFR, other personnel with DC&P responsibility may be less so.


  • persons responsible for DC&P (management disclosure committee, Board disclosure committee or other personnel) must be fully informed of the SEC’s non-GAAP focus and the substance of the new C&DIs; and
  • DC&Ps must operate so that such persons receive all the information they need to evaluate non-GAAP measures in light of these broader reporting responsibilities.

DC&P personnel must carefully consider all non-GAAP disclosures to ensure that they:

  • are transparent, understandable and supportable,
  • work together with GAAP and other disclosures (including company strategy, competitive position and forward-looking statements) to paint a clear and accurate historical, current and prospective picture of the company,
  • comply with a well-considered company policy or philosophy regarding the types of special items that are appropriate candidates for GAAP adjustments,
  • are consistently applied across applicable reporting periods, and
  • are revised or eliminated as circumstances change at the company.