I've been testing KML To Layer GP Tool for ground overlays. When rotation parameter goes to 0, compared with Google Earth, seems fine. But if rotation is like 30, it streches the image.
Interesting part is when dragging KML file into ArcGIS Online, it snaps correct ! But not with ArcGIS Desktop. Since KML Layer is not supported in SceneView, I have to solve this in ImageElement or MosaicDataset. But both cases doesn't fit the image exact place.
Sample KML File:
To simulate, just run KML To Layer tool in Desktop. Zoom into 1215 McBride Ave and see image swelled into way. You can see on GoogleEarth without distortion. Main reason of distortion is geographic coordinate system. If you call images with ImageElement, ExtentAndRotationGeoreference using Web mercator equivalent coordinates, it will fit correct.