Managers almost always define non-GAAP earnings to exclude the effects of acquisition and restructuring expenses, the amortization of intangibles, and impairments. I find that managers with a history of reporting non-GAAP earnings act as if they place lower weight on these excluded expenses when making real activities and accounting choices. They pursue more and larger acquisitions, have higher total capital investment, are more likely to restructure, and are more likely to recognize discretionary impairments. In a difference-in-differences setting, I find that non-GAAP reporting firms are less likely to alter their restructuring activities following a significant change in accounting rules for restructuring expense recognition. Finally, in supplementary analyses, I find that non-GAAP-reporting firms tend to repeat these real activities and accounting choices year-after-year, resulting in more persistent special-item expenses.

SEC rules require managers to reconcile their non-GAAP earnings forecasts with the most directly comparable GAAP forecasts unless doing so would entail ‘unreasonable effort.’ A significant number of managers rely on the unreasonable efforts exception to justify the omission of comparable GAAP forecasts. We analyze firms that rely on the unreasonable efforts exception and find that their non-GAAP earnings forecasts are more likely to exclude significant recurring expenses that are not excluded by analysts. Our results suggest that almost a third of managers exploit the unreasonable efforts exception to exclude significant recurring expenses from their earnings guidance.

We investigate the effects of audit partner rotation among U.S. publicly listed firms, utilizing the fact that audit partners are periodically copied by name in public correspondence between issuers and the Securities and Exchange Commission. Relative to non-rotation firms, we find no evidence of a change in the frequency of misstatements following the partner rotation; however, there is an increase in the frequency of restatement discoveries and announcements. We also find an increase in deferred tax valuation allowances. Overall, the results provide some evidence suggesting that U.S. partner rotations support a fresh look at the audit engagement. JEL Classifications: M41; M42; M48. Data Availability: Data are publicly available from sources identified in the article.