Internal Controls & GAAP vs. Non-GAAP Reporting

Posted by Nancy Johnson on August 19, 2011

As reported by Accounting Today, a new study highlights the correlation between a strong, independent board and financial reporting integrity in companies that choose non-GAAP reporting measures. 

According to the study, using non-GAAP reporting measures helps companies better predict future earnings potential. However, this approach makes companies more vulnerable to fraud and earnings manipulations.

SOX regulations, which follow GAAP measures, help to increase financial integrity in public companies, since any public company that uses non-GAAP measures must reconcile their numbers against GAAP's. Still, some public companies - such as those with a weak Board of Directors or ineffective internal control over financial reporting - remain at risk of reporting misrepresentations.

With no SOX requirements to keep them in check, private companies that follow non-GAAP measures might be especially vulnerable to earnings manipulations. They also face expensive reconciliations if they ever decide to go public.

So what's a non-GAAP company to do? The study points to Board of Directors independence as key to ensuring accuracy and integrity. We at Vibato, of course, would add another suggestion: tighten up internal control, so that no matter what accounting pricinciples you follow, your company can protect itself against earnings manipulation.  


Tags: Internal Controls, GAAP vs. non-GAAP