On March 14, 2023, the SEC announced a settled enforcement action against DXC Technology Company (DXC) based on misleading non-GAAP measures and related ineffective disclosure controls and procedures.  The company disclosed non-GAAP net income and non-GAAP diluted EPS measures that were adjusted for “transaction, separation and integration-related costs (TSI costs),” which were described as costs related to the merger that formed the company.  DXC’s disclosures, as required by regulation S-K Item 10(e), about why the measures provided useful information to investors stated:

“We present these non-GAAP financial measures to provide investors with meaningful supplemental financial information, in addition to the financial information presented on a GAAP basis. Non-GAAP financial measures exclude certain items from GAAP results which DXC management believes are not indicative of core operating performance. DXC management believes these non-GAAP measures allow investors to better understand the financial performance of DXC exclusive of the impacts of corporate wide strategic decisions. DXC management believes that adjusting for these items provides investors with additional measures to evaluate the financial performance of our core business operations on a comparable basis from period to period.”

However, according to the SEC’s order:

“DXC materially increased its non-GAAP earnings by negligently misclassifying tens of millions of dollars of expenses as TSI costs and improperly excluding them in its reporting of non-GAAP measures.”

The SEC’s order goes on to state that the company’s disclosure controls and procedures were inadequate to assure that “the company’s expense classifications were consistent with its own public description of TSI costs.”  As a result, non-GAAP net income and non-GAAP diluted EPS were materially overstated in several quarters.  The order contains a very revealing look into discussions about this issue between the company’s controllership group and its former Assistant Corporate Controller for External Reporting.

DXC consented to a cease-and-desist order and will pay an $8 million penalty.  In addition, the company entered into undertakings to design and implement appropriate non-GAAP measure policies and disclosure controls and procedures.

The use of non-GAAP measures has consistently been at or near the top of frequent SEC comment areas, and this case is a clear indicator that the Enforcement Division is also focused on misuse of non-GAAP measures.

As always, your thoughts and comments are welcome.