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SEC Charges Issuer for Misleading Non-GAAP Disclosures Related to M&A Add-backs

Client memorandum | March 22, 2023

Authors: Andrew B. Barkan, Lee T. Barnum, Brian Hecht, Joshua Wechsler, Matthew I. Levy, Daniel Neuman

On March 14, 2023, the U.S. Securities and Exchange Commission (the “SEC”) released a cease-and-desist order (the “Order”)[1] in connection with alleged violations by a reporting company (the “Company”) of Regulation G and other federal securities laws related to non-GAAP disclosures. The Order relates to the Company’s adjustments for transaction, separation and integration-related (“TSI”) costs to certain non-GAAP measures, including its non-GAAP net income. These adjustments were made in multiple quarterly and annual reports and earnings releases.  As a result of the improper non-GAAP adjustments, according to the Order, on a quarterly basis the Company materially increased its non-GAAP earnings by negligently “misclassifying tens of millions of dollars of expenses.” The action is notable as non-GAAP adjustments related to M&A activity are fairly common. The Order is also noteworthy because enforcement actions with respect to Regulation G violations have historically been relatively uncommon. The Company agreed to pay a penalty of $8 million and adhere to other compliance requirements.

The SEC in its Order highlights the importance of maintaining adequate disclosure controls and procedures as well as the need for accurate non-GAAP disclosure in SEC filings and earnings releases. This action by the SEC serves as an important reminder for companies to maintain focus on Regulation G compliance in their use of non-GAAP measures and related adjustments, as well as a warning of the potential consequences that could flow from disclosures deemed improper by the SEC.

The full text of the SEC’s press release can be found here, and the full Order can be found here.


The Company was formed in 2017 as a result of a merger. In its subsequent financial reporting, the Company presented several non-GAAP measures with adjustments (add-backs) for various costs related to the 2017 merger, certain other acquisitions and the spin-off of a business, which comprise the TSI adjustments that were the focus of the Order. The SEC states in the Order that, starting in 2018 through the third quarter of its fiscal year 2020 (the “Relevant Period”), the Company: (i) failed to implement a non-GAAP policy or formal disclosure controls and procedures; (ii) did not properly document the basis on which the TSI expense should be excluded from certain non-GAAP measures; and (iii) provided misleading disclosure in its SEC filings and earnings releases.

Alleged Failure to Implement Formal and Effective Disclosure Controls and Procedures

The SEC alleged that the Company failed to properly implement formal disclosure controls and procedures, including a non-GAAP policy, during the Relevant Period. The SEC stated in the Order that the Company “had no process by which its employees evaluated whether proposed TSI costs were consistent with the description of TSI costs included in its non-GAAP disclosure.” Rather, the Company relied on an informal process, which allowed for certain expenses to be improperly excluded as TSI costs from its non-GAAP net income, non-GAAP diluted EPS and other non-GAAP measures. According to the Order, due to this informal process, the Company’s Financial Planning & Analysis group (“FP&A”), which was responsible for the initial approval of the classification of expenses that were proposed by the Company’s business units as potential TSI costs, did not require the business units to document: (i) the basis on which a proposed expense might be classified as a TSI cost; (ii) how the expense related to a transaction or integration project; or (iii) the expected amount or duration of the cost. FP&A also did not, according to the SEC, consistently document the reason for its own approvals of TSI cost classification and did not annually reassess if such classifications were appropriate. The SEC additionally noted that employees in each of the FP&A and the Company’s controller group, which was responsible for reviewing and providing final approval of TSI costs for inclusion in the company’s SEC filings, were under the impression that the other group was performing a more robust analysis and vetting process of the TSI costs. Citing excerpts from internal email correspondence in the Order, the SEC flagged multiple occasions when the Company’s former Assistant Corporate Controller for External Reporting (the “ACC”) questioned certain costs that were being classified as TSI. When the ACC requested supporting documentation and information from FP&A, the ACC either did not timely receive such information or was provided with incomplete or inaccurate information.

The facts highlighted in the Order indicate that the SEC is focused on disclosure controls and procedures relating to the collection and substantiation of information that forms the basis of companies’ non-GAAP reporting. Reporting companies should make sure that they maintain adequate disclosure controls and procedures in order to make certain that their non-GAAP disclosure is accurate. Among other things, companies should ensure that their internal policies: (i) document the basis for the classification of costs being excluded from non-GAAP net income or similar measures, including the relationship of the expenses to the relevant transaction and the expected amount or duration of the cost; (ii) provide for the reassessment of such classifications on a recurring basis; and (iii) require evaluation of whether the classification of such costs is consistent with the description of such excluded costs in the company’s public disclosures.

Alleged Material Misstatements

The SEC also alleged that as a result of the Company’s failure to implement an appropriate policy with regard to reporting non-GAAP measures or maintain adequate disclosure controls and procedures specific to its non-GAAP financial measures, the Company made materially misleading public statements about its TSI costs during the Relevant Period.

Beginning with its 2018 fiscal year, the Company amended its TSI disclosure to include certain costs associated with the then-pending separation of its U.S. public sector business (“USPS”) from the Company. Specifically, the Company included the following language in its earnings release during the Relevant Period: “Transaction, separation and integration-related costs – reflects costs related to integration planning, financing, and advisory fees associated with” the merger that formed [the Company], other acquisitions and the spin-off of USPS.”

However, over the Relevant Period, according to the Order, the Company misclassified certain expenses, including internal labor costs, unrelated relocation costs for a data center and other non-TSI expenses, as TSI costs. As a result, according to the Order, in multiple periods, the Company’s reported non-GAAP net income and non-GAAP diluted EPS were materially misleading.

Additionally, the Company included the following language in its disclosure: “these non-GAAP measures allow investors to better understand the financial performance of [the Company] exclusive of the impacts of corporate-wide strategic decisions. . . [and provide] investors with additional measures to evaluate the financial performance of our core business operations on a comparable basis from period to period.” The Company’s SEC filings also stated that “[the Company’s] management believes the non-GAAP measures provided are also considered important measures by financial analysts covering [the Company], as equity research analysts continue to publish estimates and research notes based on our non-GAAP commentary, including our guidance around non-GAAP EPS.” Importantly, the SEC noted in its Order that this language demonstrated that the Company’s management understood that the non-GAAP measures were material to investors, and, therefore, when also taking into account the dollar amount of non-GAAP net income that was overstated due to the negligent misclassification of certain costs over the Relevant Period,[2] reasonable investors would consider such non-GAAP financial information material in deciding whether to purchase the Company’s securities during the Relevant Period.

Pursuant to Item 10(e)(1)(i) of Regulation S-K, the SEC requires registrants to include a statement in their SEC filings (such as in annual reports on Form 10-K) that discloses the reasons why management believes that presentation of a non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations. For example, in light of this requirement, many companies state that their non-GAAP financial measures provide a meaningful evaluation of the company’s core operating performance. Therefore, based on the SEC Order, companies reporting non-GAAP metrics should be aware that the SEC may take into account such language as an acknowledgement that such non-GAAP disclosure is inherently material to investors.


The SEC alleged in its Order that the Company violated a variety of federal securities laws, including rule 13a-15(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (related to disclosure controls and procedures), Rule 100(b) of Regulation G of the Exchange Act (related to disclosure of non-GAAP measures) and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended (related to untrue statements of material fact). The alleged violation of Section 17(a)(2) is based on the Company’s having offered and sold securities during the Relevant Period, including in connection with employee compensation awards and public offerings of debt securities. With respect to the violations under Sections 17(a)(2) and 17(a)(3), the SEC noted that negligence is sufficient to establish violations under these rules. This differs from a violation under Rule 10b-5 of the Exchange Act, which requires the higher standard of scienter.


As we detailed in an earlier update,[3] the SEC has recently increased its focus on non-GAAP disclosure and has indicated that recognition and measurement principles inconsistent with GAAP may be materially misleading to investors, even with detailed explanatory disclosure. Publication of the Order illustrates the continuing focus by the SEC on companies’ non-GAAP disclosures in their earnings releases and SEC filings. In addition, the Order underscores that the SEC may even take into account language explaining why management discloses non-GAAP information as an acknowledgement that the non-GAAP disclosure is inherently material to investors. Accordingly, reporting companies should be vigilant in maintaining effective disclosure controls and procedures to ensure accurate reporting of non-GAAP measures. Add-backs to non-GAAP measures for M&A activity and other transactions or projects have become fairly common. Companies should regularly review their non-GAAP metrics and each of the component adjustments to ensure that they are accurate, up-to-date and comply with the SEC’s disclosure rules. Companies should also take care to properly document the items that are reflected in such add-backs and assess the procedures by which such items are reviewed and approved.

[1] See Securities Act of 1933 Release No. 11166, Securities Exchange Act of 1934 Release No. 97140, Accounting and Auditing Enforcement Release No. 4391 and Administrative Proceeding File No. 3-21342, dated March 14, 2023.

[2] The SEC Order cites the material impact of the Company’s overstated non-GAAP net income over three quarters during the Relevant Period as follows: (i) for the second quarter of FY2019, non-GAAP net income was listed as $573 million, overstated by at least $29 million (approximately 5%); (ii) for the fourth quarter of FY2019, non-GAAP net income was listed as $589 million, overstated by at least $30 million (approximately 5%); and (iii) for the first quarter of FY20, non-GAAP net income was listed as $472 million, overstated by at least $24 million (approximately 5%).

[3] See the Fried Frank Client Memorandum, dated December 14, 2022.

Additional information

SEC Issues Updates to Non-GAAP Financial Measures Compliance & Disclosure Interpretations

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