Non‐GAAP earnings reporting following going‐concern opinions

Abstract

We examine non‐GAAP earnings reporting following a going‐concern audit opinion (GCO). Using a propensity score‐matched sample, matching first‐time going‐concern issuing companies with firms in financial distress that did not receive a going‐concern report, we find that the likelihood and frequency of non‐GAAP earnings reporting are lower following GCOs. In additional analyses, we find the negative association between the announcement of GCOs and the likelihood and frequency of non‐GAAP earnings reporting stronger when GCOs are issued by industry‐specialist auditors and when GCOs are unexpected, but do not find litigation risk or managers' ability to affect the association. These results are consistent with a decrease in investor demand for non‐GAAP earnings disclosures following GCOs.

The Informativeness of Non-GAAP Earnings: Empirical Evidence on China

“…Non-GAAP earnings are more informative than non-recurring gains and losses (Wang, 2017). Zhang et al (2022) showed that the likelihood and frequency of non-GAAP earnings reporting are lower following a goingconcern audit opinion (GCO). Young (2014) reviewed the academic and professional debate surrounding non-GAAP earnings reporting by management, arguing that the demand for customized performance reporting is a natural response to constraints imposed by a one-size-fits-all reporting system and that the non-GAAP phenomenon is part of a long-standing debate over the definition and presentation of periodic performance and his work was further discussed by Miller (2014).…”