Financial Reporting by Business Line Attracts SEC Scrutiny (1)

Financial reporting of large segment-level expenses was a prominent topic in conversations between Wall Street’s regulator and firms last year, according to an Ideagen Audit Analytics report.

Segment reporting accounted for 18% of US Securities and Exchange Commission comment letter conversations related to financial filings in 2024, the white paper published Tuesday said. That puts segments among the top three issues discussed last year, a higher rank than the topic’s overall trend over the past decade.

The paper focuses on conversations that include multiple comment letters between the SEC and a company related to a review of quarterly or annual filings.

SEC staff can ask companies in comment letters to provide further details to better understand disclosures as they assess compliance with generally accepted accounting principles, or GAAP. In some cases, they may even ask the company to revise the disclosure in a document filed to the regulator.

“The industry is listening to investors and trying to provide additional disclosure,” said Marie Pupecki, accounting research manager at Ideagen Audit Analytics. “And the SEC is trying to ensure that that disclosure is what the investors have been asking for and that it’s not misleading and that it appropriately meets the requirements.”

Accounting guidelines define operating segments as units within a company that earn money and incur expenses and whose results are regularly reviewed by a “chief operating decision maker,” usually the CEO or another executive.

Questions about reporting segment-level expenses have likely increased in recent years due to the Financial Accounting Standards Board’s 2023 update to accounting guidelines, the report said.

The standard-setter’s plan requires disclosure of significant segment expense categories that are reported to businesses’ chief operating decision makers, according to the report. FASB has said the information should help investors better understand companies’ overall performance.

SEC officials have warned companies to proceed with caution in following the rules. The regulator doesn’t want companies using the standard to convey an overly rosy outlook.

The segment reporting-related comment letter conversations that the paper analyzed from 2015 to 2024 refer to issues like changes in the measurement of segment amounts from period to period, as well as reconciliations of total segment revenues.

FASB’s update also allows companies to report more than one profit measure per segment—including metrics that don’t comply with GAAP if company executives use them to observe segment performance.

SEC regulations require businesses to reconcile non-GAAP measures to their most directly comparable GAAP metric.

“You did see a little bit of clarification to ensure that people were still considering that these segment measures represented non-GAAP and would need to have reconciliations for these additional segment measures as a result,” Pupecki said, referring to the comment letter conversations.

Unofficial Metrics

Non-GAAP measures were once again the most commonly raised accounting issue, referenced in more than 300 comment letter conversations in 2024, the report said.

The SEC provides rules related to the disclosure of these performance measures, which encompass a wide array of metrics including free cash flow and adjusted net income.

The metrics made up 36% of total conversations started between the regulator and companies during 2024, according to the report. The technology, manufacturing, and real estate and construction industries were among those where non-GAAP measures were a common conversation topic.

A documented increase in SEC-registered companies presenting non-GAAP metrics to their investors led staff in the agency’s division of corporation finance to issue new compliance and disclosure interpretations in 2016 relating to elements of the measures and disclosures, the report said.

There’s no standard method of calculating these measures. FASB’s preliminary inquiry into whether it should pursue formalizing any financial performance indicators was met with mixed feedback as auditors and investors debated next steps.