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This article outlines some of the reasons why investors and regulators are being careful when looking at companies that use their own custom measurements when showing earnings. Companies that partake in such practices are often more likely to in run into accounting problems, than companies that adhere to a more strict application of GAAP principles (Rapoport, 2016). The reason these companies run into issues is because the reported earnings numbers often report the earnings while omitting the "bad stuff". When looking at S&P 1500 companies, those using non GAAP income metrics the drastically improve what would have been their GAAP income by greater than 100% are nearly twice as likely as companies that are GAAP only to have to file formal restatements of income (Rapoport, 2016). Companies like Valeant, that report earnings that omit amortization of intangible assets, acquisition cost as well as other expenses, can be misleading to investors and lead the issues in accounting down the road (Rapoport, 2016).
Some companies claim that the use of non GAAP metrics aid investors, because they are customized to fit the company and its goals, but in May of 2016 the Securities and Exchange Commission issued guidelines that warned companies not to place too much focus on non GAAP metrics (Rapoport, 2016).
Practices, like those set up in GAAP, are in place for a reason, to give outside investors the opportunity to look over a companies' financials and determine the fiscal health of the company. Using customized metrics voids that opportunity for fair evaluation. Customized earning metrics could give investors a biased view of a company over a company that adheres to GAAP only metrics. Customized metrics could show earning 100% or more, than the earning that would be shown using GAAP, would certainly influence uninformed investors an unfair look at the financial health of the company.
Companies that employ non GAAP custom earnings metrics not only are walking a fine line with their accounting, they are also flirting with unethical business practices. Publishing misleading earnings reports to shareholders could be seen as an unethical practice. Reporting misleading earnings is reminiscent of ENRON, showing investors continuous growth with mark to market accounting methods, before the cards came crashing down. Had ENRON used GAAP to report earnings and given true and accurate information, they may not have risen the way they did, but they certainly would not have the catastrophe that they had once everything finally came to the surface.
It seems that in accounting, as in life, honesty is the best policy.