SEC To Wall Street: No More Non-GAAP Accounting. For Real This Time, We're Serious

The SEC says it is finally cracking down on non-GAAP accounting. Wall Street companies have been using non-GAAP accounting since the 1990’s. Now, only a couple of decades after it appeared, the SEC is springing into action to nip this non-GAAP fad in the bud.

GAAP is an acronym for “generally accepted accounting principles,” and non-GAAP earnings are a form of “alternative” earnings measures that a company feels better-represents its performance than GAAP measures do.

Unfortunately, companies can use non-GAAP metrics to mislead investors.

“The point is, now the company has created a measure that no longer reflects its business model,” SEC accountant Mark Kronforst explains.

“We’re going to take exception to that practice.”

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One recent example of the type of difference that non-GAAP accounting can make is Alcoa Inc AA’s Q1 earnings. The company reported a Q1 GAAP net income loss of $501 million. However, thanks to “restructuring charges and other,” Alcoa reported a non-GAAP $532 million profit for the quarter.

According to Benzinga Pro, rough estimates show the majority of S&P 500 companies now use non-GAAP metrics in some capacity.

An American Accounting Association report claims that more than 60 percent of the companies in the S&P 500 were excluding GAAP expenses from their non-GAAP earnings as far back as 2001. Now, sixteen years later, the SEC is on the case. Supposedly.

Disclosure: the author holds no position in the stocks mentioned.