Auditing Non‐GAAP Measures: Signaling More Than Intended

ABSTRACT Many companies regularly disclose non‐GAAP performance measures to communicate firm‐specific information that does not fit within the mold of GAAP reporting. However, these non‐GAAP measures may have low information content or even be misleading to investors. Thus, the question arises of whether auditors should play a larger role in the reporting of non‐GAAP measures, which currently are not audited. We run an experiment to provide ex ante evidence on the effect of auditing non‐GAAP measures. Specifically, we present investor‐participants with a non‐GAAP measure that should be used when making investment judgments (more informative) or should not be used when making investment judgments (less informative) and is either audited or is not audited. As predicted, we find that, when participants view a non‐GAAP measure that is more informative, they appropriately use the non‐GAAP measure in their investment‐related judgments, regardless of whether the measure is audited. However, also as predicted, we find that, while participants appropriately do not use a less informative non‐GAAP measure when it is not audited, participants inappropriately do use the less informative non‐GAAP measure in their investment‐related judgments when it is audited. Mediation results provide evidence consistent with audits affecting investors' reliance on non‐GAAP measures. Specifically, our results are consistent with audits of non‐GAAP measures signaling more than is intended, evidenced by investors perceiving an audited non‐GAAP measure as being useful in their investment decisions when the measure is less informative to them. Our findings suggest that regulators should exercise caution when it comes to prescribing assurance over non‐GAAP measures. RÉSUMÉ Auditer des mesures non conformes aux PCGR : fournir plus d'information que prévu De nombreuses entreprises divulguent régulièrement des mesures de rendement non conformes aux PCGR pour communiquer de l'information propre à l'entreprise qui ne rentre pas dans le moule de l'information fondée sur les PCGR. Toutefois, ces mesures non conformes peuvent contenir moins d'information ou même induire en erreur les investisseurs. Par conséquent, on se demande si les auditeurs devraient jouer un plus grand rôle dans la communication de mesures non conformes aux PCGR, qui ne sont actuellement pas auditées. Nous effectuons une expérience pour fournir des données probantes ex ante sur l'effet de l'audit de mesures non conformes aux