SEC Intervention and Industry Guidance: The Effect on Non-GAAP Financial Disclosures

50 Pages Posted: 18 Sep 2008 Last revised: 8 Dec 2014

See all articles by Steve Fortin

Steve Fortin

University of Waterloo - School of Accounting and Finance

Peng Liu

Cornell University - S.C. Johnson College of Business - School of Hotel Administration

Desmond Tsang

McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 16, 2008

Abstract

This paper examines how the U.S. Securities and Exchange Commission (SEC) intervention in 2003 regarding non-GAAP disclosures affects the reporting of Funds from Operations (FFO), an industry-guided non-GAAP measure commonly reported by Real Estate Investment Trusts (REIT). We find that, contrary to prior findings on pro forma earnings, SEC intervention does not deter the reporting of FFO. Nonetheless, we show that, subject to additional disclosure requirements and increased scrutiny by the SEC after 2003, companies are more likely to follow industry guidance in selecting FFO exclusions. While research in pro forma shows SEC regulations motivate firms to inappropriately exclude some items that are persistent, we find that all exclusions from FFO have become more transitory after SEC intervention. We also find that companies are less likely to manage the FFO measure to beat or meet analysts' forecasts and the market perceives FFO as being more value relevant following intervention by the SEC. Collectively, our findings suggest that, with sufficient industry guidance, the SEC can best achieve its objectives of improving the quality of non-GAAP reporting without reducing firms' willingness to provide value relevant non-GAAP information or increasing managers' likelihood to reclassify recurring expenses into the recommended exclusion items.

Keywords: Non-GAAP reporting, Regulation G, Sarbanes-Oxley, Industry Guidance, Funds from Operations, REIT

JEL Classification: M41, M43, M45, G29, G38, M48

Suggested Citation

Fortin, Steve and Liu, Peng and Tsang, Desmond, SEC Intervention and Industry Guidance: The Effect on Non-GAAP Financial Disclosures (September 16, 2008). Available at SSRN: https://ssrn.com/abstract=1268911 or http://dx.doi.org/10.2139/ssrn.1268911

Steve Fortin

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Peng Liu

Cornell University - S.C. Johnson College of Business - School of Hotel Administration ( email )

448 Statler Hall
Ithaca, NY 14853
United States
6072542960 (Phone)

Desmond Tsang (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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