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Has interim financial reporting by listed companies on quarterly basis proved counter-productive? The usefulness and implications of quarterly reporting are being debated in the US and other countries. The reason this time is not a failure in accounting or reporting, but a tweet from US President Donald Trump in August 2018 with reference to his interaction with Indra Nooyi, the just retired CEO of Pepsi. He asked the SEC to review the requirement of quarterly reporting to make it half-yearly.
Some of the top corporate leaders in the US and the UK have earlier argued that quarterly reporting has led to a short-term focus in their decision-making. This further entails considerable time and energy in preparing financial results, and then in explaining and responding to queries of investors, market analysts and media. The Investor Association of UK, which represents top fund managers, has termed quarterly reports as costly and distracting.
On the other hand, quarterly reporting has been considered important to provide stakeholders current information on a company’s growth and performance, rather than keep them waiting till annual reporting. The sole purpose is to enable them to predict future direction and evaluate their investment decisions on a continuing basis.
In the US, quarterly reporting date backs to the Securities Exchange Act, 1934 which was enacted post the stock market crash of 1929. In India, SEBI, mandating the requirement, issued guidelines for quarterly financial reporting in 2000. The ICAI issued accounting standard for Interim Financial Reporting in 2002.
There are various challenges in reporting on a quarterly basis. A quarter is too short to be considered as a full period in itself, separate from other quarters and not as integral to the annual period. The accounting standards applicable for annual accounts are to be applied for quarterly reports as well. The implications of this can be seen in the huge volatility in recent quarterly results of banks due to one-time provisioning for stressed loans.
Flexibility needed
Quarterly reporting can be made flexible or amenable to book one-off transactions or in recognising or deferring an item of income or expense to shore up financial results of a quarter. The ability to do so in a circumspect manner significantly reduces in the case of half-yearly or annual reporting.
Financial results influence the perspective and perception of investors and other stakeholders. A quarter is too short a period in the life of a corporate for that purpose. Further, the management prepares term strategies and to implement those formulate annual plans.
Focus on quarterly results shifts their attention to short-term approaches and actions that positively impact quarterly results and capital market sentiments. Surpassing market estimates for quarterly earnings tends to receive prime attention. The decisions regarding investments, R&D, brand development and the like expenditures, which generate revenue in future, suffer as a consequence. In fact, faced with counter-arguments,the Financial Conduct Authority of the UK, in 2014, stopped mandatory quarterly reporting introduced in 2007. An European Union directive rolled back the requirement of quarterly reporting in 2013.
Both pros and cons of reporting of quarterly results weigh strongly. Obviously, a balance needs to be struck between corporate expediency and regulatory imperatives, particularly to protect interest of small investors.
Interim financial reporting could be half-yearly. However, information blackout for a long period of six months is against all the cannons of transparency and a recipe for insider trading. Corporates should, therefore, be further mandated to file on quarter basis a succinct report on management discussion and analysis (MDA), giving significant trends/deviation in revenues and expenditure, material events and one-of-items taking place during the quarter.
This report should be issued after an independent review by the statutory auditor. While the capital market the world over would keenly watch the outcome of review being undertaken by the SEC, the objectives behind interim reporting are best achieved if information need of investors are met in a transparent manner without the management rushing for quarterly results.
The writer is former MD and CEO of PFS
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