Non-GAAP Reporting and Accounting Restatement

In this study, I examine whether disclosing Non-GAAP earnings is a signal of experiencing accounting restatement. I propose a scenario in which earnings are managed within the constraints of GAAP guidelines, as long as there is sufficient leeway to permit income-increasing accounting choices. Managers usually avoid issuing Non-GAAP earnings because of severe penalties. If this becomes no longer possible within GAAP earning management, managers have incentives to cross the line into Non-GAAP territory. At this point, disclosing Non-GAAP earnings is positively associated with accounting restatement because of the great magnitude of earnings management. I find that firms with restatements experience a significant increase in the relative use of disclosing Non-GAAP earnings with positive other exclusions. Firms with the positive other exclusions excluded from Non-GAAP earnings may exhibit increased likelihood of fraud or core-earnings restatement. Finally, firms disclosing Non-GAAP earnings and having high accounting complexity are more likely to restate than those disclosing Non-GAAP earnings and having low accounting complexity.