INSIGHTS VOLUME 37, NUMBER 7, JULY 202320

NON-GAAP FINANCIAL MEASURES
SEC Enforcement Action Highlights Importance of
Non-GAAP Policies and Disclosure Controls

By David Korvin, Brian Lane,
Michael Scanlon, Michael Svedman, and
Mike Titera

On March 14, 2023, the Securities and Exchange
Commission (SEC) charged DXC Technology Co.
(DXC) with making material misstatements with
respect to its non-GAAP financial performance mea-
sures, stating that, DXC “negligently misclassif[ied]
tens of millions of dollars of expenses as [transac-
tion, separation and integration-related (TSI)] costs
and improperly exclude[ed] them in its reporting of
non-GAAP measures.”1 The SEC’s order also found
that DXC, and specifically its controllership func-
tion and disclosure committee, failed to maintain
“adequate” disclosure controls and procedures relat-
ing to DXC’s non-GAAP disclosures, citing the fol-
lowing shortcomings:

■ DXC had insufficient processes to ensure that
proposed expenses were accurately classified as
TSI costs, as described in its periodic reports
and earnings releases.

■ DXC did not have “adequate” disclosure con-
trols and procedures in place specific to its non-
GAAP financial measures.

■ DXC did not have a formal non-GAAP policy.
The SEC stated that these shortcomings caused

employees within the business units and financial
planning and analysis to “make subjective determina-
tions about whether expenses were related to an actual
or contemplated transaction, regardless of whether
the costs were actually consistent with the description

of the adjustment included in the company’s public
disclosures.” For example, although DXC’s public
description of TSI costs remained unchanged for two
full years, “the company had no process by which
its employees evaluated whether proposed TSI costs
were consistent with the description of TSI costs
included in its non-GAAP disclosure.”

The SEC also cited several factors that prevented
DXC’s controllership from engaging in a mean-
ingful review of proposed TSI costs, including the
large number of line items contained in the TSI cost
spreadsheet, the short time period within which to
complete its review, and the lack of access to project
and cost descriptions. Notably, when controllership
employees questioned particular expenses or raised
other concerns, they often received incomplete or
inaccurate information, and no supporting docu-
mentation was provided.

Without admitting or denying the findings in the
order, DXC consented to a cease-and-desist order,
to pay an $8 million penalty, and to undertake to
develop and implement appropriate non-GAAP pol-
icies and disclosure controls and procedures, includ-
ing providing a certification of compliance with such
undertakings.

Key Takeaways

Below are some key takeaways to consider based
on the SEC’s order and applicable SEC rules:

■ Companies Should Have Disclosure
Controls and Procedures in Place to
Identify and Disclose Non-GAAP
Adjustments. It is crucial for accounting,
legal and other personnel responsible for
public reporting to be familiar with SEC

David Korvin, Brian Lane, Michael Scanlon, Michael
Svedman, and Mike Titera are attorneys of Gibson,
Dunn & Crutcher LLP.

21INSIGHTS VOLUME 37, NUMBER 7, JULY 2023

© 2023 CCH Incorporated and its affiliates. All rights reserved.

reporting requirements as they pertain to
non-GAAP measures, and the company’s
disclosure controls and procedure documen-
tation should specifically address steps and
controls in place to identify amounts rele-
vant for non-GAAP adjustments and make
non-GAAP disclosures.

■ Employee determinations of non-GAAP
adjustments should be guided by, and eval-
uated in light of, such disclosure controls
and procedures and any other non-GAAP
policies that a company determines may be
appropriate to adopt. In addition, policies
and procedures should be designed to help
ensure the accounting and legal departments
are able to engage in a thorough review and
approval process of proposed non-GAAP
adjustments, with a view to accuracy, con-
sistency and overall compliance.

■ Descriptions of Non-GAAP Measures
Should Be Kept Consistent with Actual
Accounting Practices. To be effective,
companies’ disclosure controls and proce-
dures should include processes designed to
help ensure that non-GAAP financial mea-
sures and adjustments are described accu-
rately in periodic filings, earnings releases
and other public statements. Companies
should routinely assess whether the descrip-
tions of non-GAAP measures used histori-
cally continue to be consistent with their
actual accounting practices for identify-
ing, reviewing and approving non-GAAP
adjustments.

■ An Active and Engaged Disclosure
Committee Should Be Part of the Control
Environment. An important lesson of the
SEC’s order is the need for coordinated over-
sight of non-GAAP and other disclosures
across a company’s various departments to
promote a consistent and accurate disclosure

control environment. An active and engaged
disclosure committee should play a prom-
inent role in reviewing and commenting
on non-GAAP disclosures. The disclosure
committee should also periodically review
the disclosure controls and procedures with
respect to non-GAAP disclosure to ensure
they remain up-to-date, consistent with the
company’s actual business practices, and
accurate overall.

■ Regulation G Has a Broad Scope and the
SEC Continues to Focus on Non-GAAP
Disclosures. Regulation G applies when-
ever a public company discloses non-GAAP
financial measures, including outside of SEC
filings. Further, non-GAAP financial mea-
sures continue to be an area of focus for the
SEC, as seen by recent enforcement actions,2
public remarks,3 an uptick in SEC comments
focusing on non-GAAP disclosures and the
SEC’s recent December 2022 update to its
non-GAAP C&DIs.4 Companies should
ensure that they are approaching their non-
GAAP disclosures, including controls and
procedures regarding these disclosures, with
the care and scrutiny consistent with the
SEC’s expectations.

Notes
1. https://www.sec.gov/litigation/admin/2023/33-11166.

pdf.
2. https://www.sec.gov/litigation/admin/2018/34-84956.

pdf.
3. In public remarks before the 2017 Baruch College Financial

Reporting Conference, then SEC Chief Accountant Wesley
R. Bricker highlighted, among other things, the impor-
tance of companies having adequate disclosure con-
trols and procedures in place with respect to non-GAAP
measures.

4. https://securitiesregulationmonitor.com/Lists/Posts/
Post.aspx?ID=468.