Firm characteristics associated with concurrent disclosure of GAAP-compliant financial statements with earnings announcements

Author:Thomas D’Angelo, Samir El-Gazzar, Rudolph A. Jacob
Position:Western Carolina University, Cullowhee, North Carolina, USA
Pages:365-381
SUMMARY

Purpose This paper aims to examine the characteristics of firms that voluntary disclose generally accepted accounting principals (GAAP)-compliant statements of income, statement of cash flows (SCF) and balance sheet (BS) concurrently with quarterly earnings releases. Cardinal motivation of the paper stems from the increasing demand over the past decade by professional analysts and... (see full summary)

 
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Firm characteristics associated
with concurrent disclosure of
GAAP-compliant nancial
statements with earnings
announcements
Thomas DAngelo
Western Carolina University, Cullowhee, North Carolina, USA, and
Samir El-Gazzar and Rudolph A. Jacob
Department of Accounting, Pace University, New York, New York, USA
Abstract
Purpose This paper aims to examine the characteristics of rms that voluntary disclose generally accepted
accounting principals (GAAP)-compliant statements of income, statement of cash ows (SCF) and balance sheet
(BS) concurrently with quarterly earnings releases. Cardinal motivation of the paper stems from the increasing
demand over the past decade by professional analysts and the Securities and Exchange Commission for
concurrent disclosure of GAAP-compliant nancial statements with earningsannouncements.
Design/methodology/approach Using hand-collectedarchival data, a random sample was identied
as disclosing GAAP-compliant SCF and BS with their quarterly earnings releases compared to a control
sample identied as non-GAAP-compliant disclosing rms during the 36-month period of 2009-2011, and
several hypothesesare tested to determine managementsincentivesto disclose GAAP-compliant versus non-
GAAP nancialswith their earnings releases.
Findings The results in this paper suggest that debt nancing, corporate governance, operating
performance, earnings volatility, industry membership (such as technology and more research and
development-intensive)and complexity of operations (number of segments) are signicant characteristicsof
rms electingto concurrently disclose GAAP-compliantSCF and BS with earnings releases.
Practical implications The ndings discussedin this paper are of special interest to nancial reporting
policymakers,nancial analysts, rm managers and stakeholdersand academics.
Originality/value The voluntary disclosure literature on quarterly earnings releases is extended by
differentiating between GAAP-compliant and non-GAAP-compliant voluntary disclosers. The specic
ndings of this study may provide valuable input to policymakers as they study prevailing voluntary
disclosurerules and practices.
Keywords Voluntary disclosure, GAAP-compliant nancials
Paper type Research paper
Introduction
This paper investigates the characteristics of rms associated with the voluntary disclosure of
generally accepted accounting principals (GAAP)-compliant statements of income, statements
of cash ows (SCF) and balance sheet (BS) concurrently with quarterly earnings releases.
Although there has been a continuous demand by the Securities and Exchange Commission
(SEC) and professional analysts for the simultaneous disclosure of nancial statements
prepared under GAAP with earnings releases, the decision to disclose such information is still
GAAP-
compliant
nancial
statements
365
Journalof Financial Regulation
andCompliance
Vol.26 No. 3, 2018
pp. 365-381
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2017-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
up to managements discretion. In analyzing current corporate practices of adhering to the SEC
demand, rms can be classied into two categories. First, some rms provide reconciliation of
reported non-GAAP disclosures to GAAP under regulation G[1]. Second, some rms
voluntarily provide GAAP-compliant disclosures. A few papers have tried to gain some
insights on management incentives for voluntarily disclosing items of GAAP prepared
nancial statements with earnings releases. For instance, Chen et al. (2002) examine the
characteristics of rms concurrently disclosing BSs with their earnings announcement
compared to non-disclosing rms without looking into if these disclosures are GAAP-
compliant. DSouza et al. (2010) examine the extent and determinants of rms disclosing some
specicGAAPnancial statements items concurrently with rmsearnings releases. Although
their (DSouza et al., 2010) results support the differential (and sometimes conicting)
managerial motivations, the study is based on examining the extent of specic GAAP line
items disclosures. In addition, their sample excludes non-GAAP disclosing rms. This latter
examination structure does not fully explore corporate motivations for disclosing GAAP
versus non-GAAP nancial statements with earnings releases. The current study extends prior
research by examining corporate attributes for disclosing full-blown GAAP nancial
statements versus non-GAAP nancial statements concurrently with earnings releases.
Preliminary quarterly earnings announcements have, over time, become the most
regularly disseminated form of voluntary disclosure on corporate performance. However,
interpretation and usefulness of the content of earnings and concurrently disclosed
nancials depend on the measures used to calculate earningsand other accounting metrics.
Professional nancial analysts and SEC ofcials have been calling not only for the
concurrent disclosureof SCF and BS with earnings releases but also that earnings and other
nancial information shouldbe prepared in accordance with GAAP. For instance, Rapoport
and Michaels (2016) state that the SEC is keeping the heat on non-GAAP metrics. They
continue by asserting that non-GAAPmeasures are adjusted nancial measures a company
issues that do not comply with GAAP, the acceptable set of accounting standards that US
companies are allowed to use in reporting nancial statements and other important
performance metrics. Similarly, Randerson (2004) states given the ever-mounting investor
interest in cash ows, companies should be making a concerted effort to provide such
information in their quarterly earnings releases. He further argues that cash ow from
operations is viewed as the best accounting metric of business performance because it
cannot be easily manipulated through adjustments and creative interpretations of GAAP.
More recent evidence provided by Lahart (2016) shows that in 2015, S&P rmsGAAP
earnings were 25 per cent lower than publicizednon-GAAP earnings (i.e. non-GAAP dened
by individual rms and pro-formaearnings). According to Calcbench, a provider of nancial
data, of the 328 rms they analyzed that reportedGAAP losses for 2015, adjustment to non-
GAAP measures improved earnings by a combined $65bn or approximately 70 per cent of
their aggregate GAAP net losses(Shumsky and Francis, 2016). An objective assessment of
these results supports an opportunistic motive theory and tends to validate the concerns
expressed by regulators, analysts and the nancial press over managementsabuse in its
reporting of non-GAAPnancial measures.
High ranking ofcials of the SEC alsohave expressed concern against the misuse of non-
GAAP nancial metrics. In a speech to a conference of the American Institute of Certied
Public Accountants (AICPA) in December 2013, David Woodcock (2013), then Chairman of
the SECs Financial Reportingand Audit Task Force, stated that:
[...] the task force is examining the use of non-GAAP performance indicators by companies that I
believe conate commonly used performance-indicating terms with nonstandard measures to
enhance their standing and claim prots rather than losses, which amounts to mislabeling.
JFRC
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366

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