Wednesday, September 14, 2016

At last, the financial reporting news we’ve all been waiting for this year! Federal regulators have charged someone for improper use of a non-GAAP accounting metric.

Last week federal prosecutors in New York indicted Brian Block, the former head of finance for American Reality Capital Partners, on charges of conspiracy, securities fraud, making false filings to the Securities and Exchange Commission, and submitting false certifications to the SEC. If convicted, Block could face more than 20 years in prison.

The non-GAAP metric in question is “adjusted funds from operations,” or AFFO—a common metric among real estate investment firms like ARCP. Prosecutors say that in 2014, Block knew his firm had erroneously calculated its AFFO before it announced earnings, and then didn’t correct the error in subsequent filings. That added a false 3 cents per share to AFFO, and misled investors into believing the firm was on pace to meet full-year earnings guidance.

The U.S. attorney’s office for Manhattan announced the charges on Sept. 8, and is a rare example of enforcement over misuse of non-GAAP accounting. The charges are all the more newsworthy right now because the SEC has launched a task force to review companies’ use of non-GAAP reporting, and also published fresh guidance in May about how filers can use non-GAAP without drawing regulatory fire.

Calcbench has looked at the prevalence of non-GAAP accounting several times already this year, including our report on non-GAAP net income and a follow-up post looking at non-GAAP net income specifically within the S&P 500.

The SEC itself has not taken any action against Block that we can see. (Although facing criminal charges in federal court is probably headache enough for him.) Under SEC reporting rules, misuse of non-GAAP metrics is a violation of Regulation G. The agency might be investigating other parties on that point; we don’t know. But for all the talk about stepping up enforcement, so far the SEC hasn’t taken enforcement under Regulation G in years.

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