Business Metric Manipulation
In addition to quarterly and annual financial statements, many companies also publish non-Generally Accepted Accounting Principles (or non-“GAAP”) business metrics (or “metrics” for short). Such metrics are non-GAAP since their calculation and presentation is not dictated by GAAP. Common non-GAAP metrics include: total customers, adjusted EBITDA, average revenue per user, total contracts, backlog, and many other measures of a company’s performance not included in standard GAAP financial statements.
A company may be held liable for publishing false or misleading business metrics that deceive the investing public. The simplest examples of such fraud include inflating customer counts or inflating the number of contracts in the company’s backlog. But sometimes the fraud may be more subtle—for example, the company may change the way its metrics are calculated from period to period without disclosing the change, or the company may change the underlying definition of certain metrics to manipulate the units included in calculating the metric, in order to create a false appearance of growth.
Proving that metrics are misleading can sometimes be more complicated than proving the falsity of figures governed by GAAP. Standard balance sheet, income statement, and other GAAP figures are misleading when they are not properly calculated according to GAAP, but there is no similar clear rule for non-GAAP metrics. Instead, the misleading nature of non-GAAP metrics must be evaluated on a case-by-case basis, with special attention paid to the particular definitions of the metrics over time. Although the SEC has taken a more critical stance towards non-GAAP metrics in recent years, they are still fertile ground for manipulation and dishonesty. Identifying how exactly metrics are misleading and presenting that evidence to a court often requires skilled forensic analysis by experienced securities lawyers.
If you believe that a company is publishing or has published false or misleading business metrics, please contact the securities class action attorneys at Glancy Prongay & Murray LLP.