Jack Weston, the CEO of Evans, Inc., along with Evans’ CEO, Jason Stiller, used non-GAAP numbers to develop the earnings statements for Evans for 2016. The result was that the earnings for Evans were 16% higher in the financial reports than they actually were. Executive compensation at Evans is tied to earnings, and Jack and Jason’s bonuses for 2016 were 26% higher than in 2015 because of the jump in earnings that were later discovered to be fabricated using non-GAAP methods. Which of the following is correct? a. Under Dodd-Frank, the auditors are liable for the falsified earnings, not the CEO or CFO. b. As long as the shareholders approved the pay packages for Jack and Jason, there is no action that they can take on the compensation. c. both a and c d. Under Dodd-Frank, Jack and Jason will be required to pay back the extra compensation they received as a result of the falsified earnings.

d. Under Dodd-Frank, Jack and Jason will be required to pay back the extra compensation they received as a result of the falsified earnings.

Explanation:

Generally Accepted Accounting Principles (GAAP) earnings refers to standards that are commonly accepted and used financial reporting by publicly traded companies.

On the other hand, non-GAAP earnings refers ton an alternative accounting method employed by companies to measure the earnings especially by excluding one-time transactions like  an organizational restructuring.

A non-GAAP method adjusts similar GAAP measure which are reported on the audited financial statements such as earnings before interest, taxes, depreciation and amortization (EBITDA) but it not backed by law.

Because non-GAAP measure is not backed by law, it can produce a misleading report when items that have impact on GAAP earnings are excluded.

As a result of non-GAAP method, many companies were affected during the Great Recession in the US leading to the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act (shortened to Dodd-Frank). the major aim of Dodd-Frank was to change federal financial regulatory agencies and almost all parts of the financial services industry of the US. One of the provisions of the Dodd-Frank is to require to pay back any compensation got through falsification of document.

Given the above, Jack and Jason will be required to pay back the extra compensation they received as a result of the falsified earnings under Dodd-Frank.

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