The Impact of Constraining Auditor Behavior and Audit Committee Questioning on Non-GAAP Reporting Decisions

While external auditors’ inflexibility during discussions over subjective GAAP reporting choices can influence management’s GAAP reporting decisions, it is important to determine if this constraining behavior impacts managers’ subsequent non-GAAP reporting. Additionally, recent calls for audit committees to question non-GAAP (in addition to GAAP) disclosures may influence non-GAAP reporting judgments. We experimentally examine if auditor flexibility and audit committee questioning influence managers’ non-GAAP disclosure choices. We find senior executives make smaller exclusions from non-GAAP earnings measures, and are less likely to prominently disclose non-GAAP earnings earlier in the earnings release, when the auditor exhibits less flexibility during discussions regarding a GAAP accounting treatment and/or when an audit committee questions both GAAP and non-GAAP disclosures. Managers are more aggressive in their non-GAAP reporting only absent both auditor constraint and active audit committee questioning of non-GAAP financials. These findings indicate that certain governance mechanisms can individually and jointly curb aggressive non-GAAP reporting.