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Companies often voluntarily provide non-GAAP earnings when they announce annual or quarterly earnings.
These numbers are controversial as they represent management’s view of permanent earnings. The SarbanesOxley Act (SOX), issued in 2002, requires that if non-GAAP earnings are included in any periodic or other report
filed with the SEC or in any public disclosure or press release, the company also must provide a reconciliation
with earnings determined according to GAAP.
Professors Entwistle, Feltham, and Mbagwu, in “Financial Reporting Regulation and the Reporting of Pro
Forma Earnings,” examine whether firms changed their reporting practice in response to the regulations included
in SOX.
Required:
1. In your library or from some other source, locate the indicated article in Accounting Horizons, March 2006.
2. What sample of firms did the authors use in their examination?
3. What percent of firms reported non-GAAP earnings (referred to as pro forma earnings by the authors) in
2001? In 2003?
4. What percent of firms had non-GAAP earnings greater than GAAP earnings in 2001? In 2003?
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Companies often voluntarily provide non-GAAP earnings when they announce annual or quarterly earnings. These numbers are controversial as they represent management’s view of permanent earnings. The Sarbanes-Oxley Act (SOX), issued in 2002, requires that if non-GAAP earnings are included in any periodic or other report filed with the SEC or in any public disclosure or press release, the company also must provide reconciliation with earnings determined according to GAAP. Professors Entwistle, Feltham, and Mbagwu, in “Financial Reporting Regulation and the Reporting of Pro Forma Earnings,” examine whether firms changed their reporting practice in response to the regulations included in SOX.
Answer the following:
- What sample of firms did the authors use in their examination?
- What percent of firms reported non-GAAP earnings (referred to as pro forma earnings by the authors) in 2001? In 2003?
- What was the most frequently reported adjusting item in 2001? In 2003?
- What is the authors’ main conclusion of the impact of SOX on non-GAAP reporting?
- Is this conclusion still true today? Provide at least two references to support your answer.
Companies often voluntarily provide non-GAAP earnings when they announce annual or quarterly earnings. These numbers are controversial as they represent management’s view of permanent earnings. The Sarbanes-Oxley Act (SOX), issued in 2002, requires that if non-GAAP earnings are included in any periodic or other report filed with the SEC or in any public disclosure or press release, the company also must provide reconciliation with earnings determined according to GAAP. Professors Entwistle, Feltham, and Mbagwu, in “Financial Reporting Regulation and the Reporting of Pro Forma Earnings,” examine whether firms changed their reporting practice in response to the regulations included in SOX.
Answer the following:
- What sample of firms did the authors use in their examination?
- What percent of firms reported non-GAAP earnings (referred to as pro forma earnings by the authors) in 2001? In 2003?
- What was the most frequently reported adjusting item in 2001? In 2003?
- What is the authors’ main conclusion of the impact of SOX on non-GAAP reporting?
- Is this conclusion still true today? Provide at least two references to support your answer.
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- Executives of several companies believe that non-GAAP financials portray a more accurate picture of company performance. Although not legal, the use of non-GAAP financials has been controversial for years. In fact, the SEC published guidance regarding the misleading impact of the use of non-GAAP figuresLinks to an external site. in October of 2017. In your opinion, are the use of non-GAAP financial measures ethical? Please explain.arrow_forwardBoeing’s top management maintains that it did not have an obligation to reveal its problems during the first half of the year. What implications does this have for investors and analysts who follow?arrow_forwardWhich of the following statements are correct regarding Sarbanes- Oxley (SOX) and Dodd-Frank (DF)? I. DF requires that public firms offer an advisory vote to shareholders on top executive compensation. II. SOX imposes criminal penalties on the CEO and CFO for fraud or for retaliation on whistle blowers. III. The compliance costs for SOX can be substantial and have encouraged some firms to "go dark." IV. DF requires companies to disclose whether directors and officers are permitted to hold put options which protect their ownership position in the firm. O I and II only O I and III only O II and III only O I, II, and III only O I, II, III, and IVarrow_forward
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