Every earnings season, a familiar ritual plays out across corporate America. A company reports its quarterly results, the press release lands, and the headline number—almost invariably—is not the one required by Generally Accepted Accounting Principles. It is, instead, an “adjusted” figure: a bespoke metric that management has crafted by stripping away costs it considers unrepresentative of the business. The market digests these adjusted numbers, analysts model off them, and the GAAP figures quietly recede into the footnotes.
This is not a fringe practice. According to PricewaterhouseCoopers, 97% of S&P 500 companies now disclose at least one non-GAAP financial measure in their public filings.[¹] The average gap between GAAP and non-GAAP earnings per share across the index runs approximately 25% to 30%, and in certain sectors—particularly technology—the divergence is far wider.[²] For institutional investors conducting fundamental analysis, this gap is not a rounding error. It is the difference between evaluating a company’s actual economic performance and evaluating a version of reality that management would prefer you to see.
At Buxton Helmsley, forensic financial analysis is at the core of everything we do. And when we examine the growing chasm between GAAP and non-GAAP reporting, we see a landscape increasingly ripe for the kind of value-destructive behavior that has defined every major accounting scandal of the past two decades.
Non-GAAP reporting is not new, but its proliferation is striking. In the mid-1990s, roughly 60% of S&P 500 companies reported at least one non-GAAP earnings metric.[³] By the early 2000s, the practice had grown so aggressively—and so unevenly—that Congress responded. The Sarbanes-Oxley Act of 2002 led to the SEC’s adoption of Regulation G in 2003, which established baseline disclosure requirements: companies using non-GAAP measures must present the most directly comparable GAAP measure alongside and provide a quantitative reconciliation. A companion rule, Item 10(e) of Regulation S-K, prohibits presenting the non-GAAP figure with greater prominence than the GAAP equivalent in SEC filings.[⁴]
In theory, Regulation G was supposed to rein in the worst abuses. In practice, the opposite occurred. The SEC relaxed certain disclosure requirements in 2010, and the use of non-GAAP measures surged.[⁵] By the time SEC Chair Mary Jo White raised the alarm in 2015—publicly expressing concern that non-GAAP metrics were being used to improve the appearance of financial performance—the genie was well out of the bottle.[⁶] The following year, SEC Chief Accountant in the Division of Enforcement Howard Scheck went a step further, characterizing non-GAAP metrics as a “fraud risk factor.”[⁷]
Yet here we are, a decade later, and the practice has only deepened. Non-GAAP measures have ranked as the number one or number two topic addressed in SEC Division of Corporation Finance comment letters for at least nine consecutive years.[⁸] In 2024, approximately 30% of all SEC comment letters contained at least one non-GAAP-related comment, with the proportion of comments addressing potentially misleading adjustments rising from 25% in the prior period to over 40%.[⁹]
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Not all non-GAAP adjustments are created equal, and the sophisticated institutional investor must learn to distinguish the defensible from the deceptive. The single most consequential—and most contested—adjustment is the exclusion of stock-based compensation expense.
The numbers are enormous. For companies in the S&P 500, total reported stock-based compensation grew at more than 10% annually between 2010 and 2022, reaching $192 billion by 2022—approximately 1.2% of aggregate revenue.[¹⁰] For U.S. public companies more broadly, that figure reached an estimated $270 billion—representing approximately 6% to 8% of total compensation.[¹¹] Among emerging cloud and SaaS companies, the distortion is even more dramatic: stock-based compensation averages a remarkable 21% of revenue, compared to roughly 2% for the S&P 500 as a whole.[¹²] For large-cap SaaS companies specifically, stock-based compensation represents 39% of current free cash flow, compared to just 4% for the S&P 500—inflating free cash flow margins by approximately 12 percentage points.[¹³]
The argument for excluding stock-based compensation is that it represents a non-cash expense. This is technically true. But it is also true that stock-based compensation dilutes existing shareholders, increases the share count, and represents a real economic cost to equity holders—it is simply one that management has elected to pay in shares rather than cash. When a company repurchases shares to offset this dilution (as many do), the buyback program effectively becomes a subsidy for employee compensation, not a return of capital to shareholders. Research has shown that companies with the highest stock-based compensation—those producing annual share dilution exceeding 3%—delivered negative 0.9% annual returns, while the lowest diluters returned a positive 16.9% annually.[¹⁴]
The second major area of concern is the persistent reclassification of recurring expenses as “non-recurring.” Restructuring charges are a textbook example. Many companies undergo some form of restructuring in any given year—headcount reductions, facility closures, strategic pivots. When these charges appear year after year, they cease to be one-time events and become a cost of doing business. Yet they are routinely excluded from adjusted earnings, creating a systematically inflated picture of ongoing profitability.
The CPA Journal’s longitudinal analysis of non-GAAP reporting from 2004 through 2019 found that non-GAAP earnings were not only consistently higher than GAAP operating income across the entire study period, but were also the smoothest of all earnings measures—exhibiting the least volatility.[¹⁵] This finding is deeply concerning: if adjusted earnings always exceed GAAP and always fluctuate less, it suggests that non-GAAP reporting is being used not to illuminate core performance, but to manufacture the appearance of stability and growth.
The SEC’s posture on non-GAAP measures has shifted meaningfully in recent years. The Division of Corporation Finance last updated its Compliance and Disclosure Interpretations on non-GAAP measures in 2022, with further clarifications issued ahead of the 2026 filing season—including new interpretive questions addressing individually tailored accounting principles and asymmetric adjustments.[¹⁶] These updates clarify that adjustments which change recognition and measurement principles required under GAAP—such as accelerating revenue recognition or switching from accrual to cash accounting—are considered individually tailored and presumptively misleading. The staff has also emphasized that management’s internal use of a metric, or investor demand for it, does not on its own overcome the prohibition on misleading measures.[¹⁷]
In practice, enforcement has been conducted primarily through comment letters rather than formal enforcement actions—a pattern that some scholars have interpreted as an indication that the SEC views most non-GAAP abuses as negligent rather than intentional.[¹⁸] The comment letter process can be effective: companies that receive non-GAAP-related comments frequently agree to revise or remove problematic adjustments in future filings. But it is a slow, iterative process, and it typically addresses one issuer at a time.
More aggressive enforcement actions have targeted cases where misleading financial reporting crossed the line into outright fraud—fraudulent revenue recognition schemes, false financial statements, and deliberate misrepresentation of business performance.[¹⁹] These cases serve as a reminder that non-GAAP reporting abuses rarely exist in isolation; where management is willing to manipulate adjusted figures, the risk of deeper accounting fraud is elevated.
Under the current SEC leadership, Chairman Paul Atkins has signaled a return to the Commission’s “core mission,” emphasizing investor protection while prioritizing “predictability, due process, rule of law, [and] integrity.”[²⁰] What this means for non-GAAP enforcement in the 2026 proxy season and beyond remains to be seen. But regardless of regulatory posture, the burden of vigilance ultimately falls on the investor.
At Buxton Helmsley, we believe that the proliferation of non-GAAP reporting is not, in itself, inherently problematic—but that it demands a level of analytical discipline that many market participants do not bring to bear. For institutional investors allocating capital on the basis of financial statement analysis, we recommend the following framework.
First, always start with GAAP. The adjusted number should be treated as supplementary context, not as the primary input to valuation. GAAP figures are audited, standardized, and subject to regulatory oversight. Non-GAAP figures are none of these things.
Second, scrutinize the reconciliation. The quantitative walk from GAAP to non-GAAP is where the story is told. Look at each adjustment individually. Ask whether it is truly non-recurring—or whether similar charges appeared in prior periods. Ask whether the adjustment removes a real economic cost (like stock-based compensation) or a genuinely one-time event (like the gain on sale of a discontinued operation). If the same items are excluded quarter after quarter, management is telling you something about what it considers its “real” business—and you should question whether that characterization is honest.
Third, compare across peers and time. One of the most insidious features of non-GAAP reporting is that it destroys comparability. Two companies in the same industry may define “adjusted EBITDA” differently, making apples-to-apples comparison impossible without reconstructing the numbers from scratch. Similarly, a company may change its non-GAAP methodology from one period to the next—a practice that the SEC’s C&DIs specifically flag as potentially misleading.[²¹]
Fourth, watch the gap. Track the spread between GAAP and non-GAAP earnings over time. A widening gap is a red flag. It may indicate that the company’s true economic performance is deteriorating while its adjusted presentation masks the decline. This is precisely the kind of signal that forensic analysis is designed to catch—and it is the kind of signal that, left unaddressed, has historically preceded material corrections and enforcement actions.
Fifth, follow the dilution. For companies that exclude stock-based compensation, always calculate diluted shares as a percentage of basic shares and track the trend. A widening gap between basic and diluted share counts signals increasing shareholder dilution that is invisible in the adjusted earnings figure. Pair this with an analysis of share repurchase activity to determine whether buybacks are creating genuine shareholder value or merely offsetting compensation-driven dilution.
Non-GAAP reporting occupies an uncomfortable space in modern capital markets. At its best, it can illuminate the economic reality of a business in ways that rigid GAAP rules sometimes cannot. At its worst, it provides corporate management with a sanctioned mechanism to present a version of financial performance that flatters, obscures, and misleads.
For institutional investors—and particularly for those engaged in active corporate stewardship—the question is not whether to use non-GAAP metrics, but how to use them without being used by them. The answer lies in the same discipline that underpins all sound investment analysis: read the actual financial statements, understand what was adjusted and why, and never accept a management-curated narrative when the audited numbers tell a different story.
The 97% of S&P 500 companies reporting non-GAAP metrics are, in effect, asking investors to see their businesses through management’s preferred lens. The forensic investor’s job is to look through a lens of their own.
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Referenced Sources:
[¹] PricewaterhouseCoopers, “Earnings with a Twist: 2024 Update on SEC Staff Non-GAAP Comment Trends,” PwC In Depth (2024).
[²] Winvesta, “EPS Growth Analysis: What Really Drives Stock Prices Explained” (2025), citing industry data showing non-GAAP EPS runs 25–30% higher than GAAP EPS on average across the S&P 500.
[³] Harvard Law School Forum on Corporate Governance, “SEC Scrutiny of Non-GAAP Financial Measures” (February 7, 2019), citing Audit Analytics data.
[⁴] Securities and Exchange Commission, Release No. 33-8176, “Conditions for Use of Non-GAAP Financial Measures” (January 22, 2003), adopting Regulation G under the Sarbanes-Oxley Act of 2002.
[⁵] The CPA Journal, “Non-GAAP Performance Measures” (April 10, 2024), noting the SEC’s relaxation of disclosure rules in 2010 and the subsequent increase in non-GAAP reporting.
[⁶] Harvard Law School Forum on Corporate Governance, “SEC Scrutiny of Non-GAAP Financial Measures” (February 7, 2019).
[⁷] Id.
[⁸] Financial Reporting Hub, “Understanding SEC Regulation of Non-GAAP Measures” (2025), citing EY SEC Reporting Update data showing non-GAAP measures have been the number one or two comment letter topic for at least nine consecutive years.
[⁹] PricewaterhouseCoopers, “Earnings with a Twist: 2024 Update on SEC Staff Non-GAAP Comment Trends,” PwC In Depth (2024), reporting approximately 30% of comment letters contained non-GAAP comments, with potentially misleading adjustment comments rising from 25% to over 40%.
[¹⁰] Mercer Capital, “Stock-Based Compensation in Volatile Markets” (February 2024).
[¹¹] Morgan Stanley Investment Management, Counterpoint Global Insights, “Stock-Based Compensation: Unpacking the Issues” (2023), estimating SBC at approximately $270 billion in 2022, or 6–8% of total compensation for U.S. public companies.
[¹²] Candor, “Why Top CFOs Are Rethinking Stock-Based Compensation” (September 2024), citing RBC Capital Markets data.
[¹³] Id., citing Wellington Management research.
[¹⁴] Winvesta, “EPS Growth Analysis: What Really Drives Stock Prices Explained” (2025).
[¹⁵] The CPA Journal, “Non-GAAP Performance Measures” (April 10, 2024).
[¹⁶] Securities and Exchange Commission, Division of Corporation Finance, Compliance and Disclosure Interpretations, Non-GAAP Financial Measures, Questions 100.01–100.06 (last updated 2026); Free Writings & Perspectives, “Understanding the Requirements Related to the Use of Non-GAAP Financial Measures” (October 2025).
[¹⁷] PricewaterhouseCoopers, “2025 AICPA & CIMA Conference: Current SEC and PCAOB Developments,” PwC In Depth (2025).
[¹⁸] Ahn et al., “Public and Private Enforcement of Non-GAAP Reporting,” Journal of Accounting and Economics, Vol. 79, Issues 2–3, Article 101760 (2025).
[¹⁹] Gibson Dunn, “Securities Enforcement 2025 Mid-Year Update” (July 29, 2025), discussing SEC charges involving fraudulent revenue recognition schemes combined with misleading financial statements.
[²⁰] Gibson Dunn, “Securities Enforcement 2025 Mid-Year Update” (July 29, 2025), quoting Chairman Atkins’ remarks at his first SEC town hall on May 6, 2025.
[²¹] Securities and Exchange Commission, Division of Corporation Finance, Compliance and Disclosure Interpretations, Non-GAAP Financial Measures, Question 100.02 (noting that inconsistent presentation between periods may be misleading).
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