The first quarter of 2020-21 is a virtual washout? This is the message coming from Corporate India which is still reeling under the onslaught of the pandemic. As accountants are busy finalising the numbers for the year ended 2019-20 there are already discussions on how to report the results of the first quarter of FY21 with April and May having nothing to show by way of business and sales.

This brings us to the question as to the need and requirement of reporting quarterly results for listed companies. Clause 41 of the listing agreement mandates this reporting, duly approved by the board of directors, and also subject to limited review of auditors. The unaudited numbers should not vary by more than 20 per cent of the audited numbers.

Pros and cons

The background of reporting results on a quarterly basis is straightforward and simple. Companies were forced to get into a regimented requirement of periodic reporting to shareholders, regulators and investors. These stakeholders also had the comfort of knowing regularly the key performance matrix of the company. Alongside this practice of publishing the results in newspapers it also provided the opportunity of comparing the results of the company with peers in the same industry and come to meaningful conclusions on the performance of the company in question.

The quarterly meetings of the audit committees and the board provided the platform to deep-dive on matters relating to internal audit and accounts on a periodic basis. The year-end exercise then was more a top-up on critical disclosures and finalisation of accounts. In actual practice, Q1 and Q3 accounts meetings became more a formality and tick in the box, and substantive discussions actually take place when the half-yearly and full-year accounts are tabled.

With all the advancement in technology and virtual communication, it is time to revisit this regulation. Investors and key stakeholders are in touch with the companies almost on a daily basis. We now live in a virtual world of daily Zoom meetings and conference calls. All material developments in a company have to be reported to the stock exchange. Multiple regulators are keeping a close tab on the functioning of listed companies. Credit rating agencies and analysts are proactive in assessing the key activities of the company on an ongoing basis.

Despite all these if frauds do take place it has nothing to do with periodicity of reporting, but is a reflection of falling integrity standards and inadequate internal controls. Even in the case of limited review undertaken by the auditors on quarterly accounts there is an expectation gap, since the board wants comfort that the numbers stand scrutiny and are accurate.

But, by its very nature, limited review is not a full-fledged audit. Further, the very fact that results have to be disclosed to public casts unnecessary pressure on the management to report growth both on top-line and profits. Invariably, the fallout is to resort to accounting decisions which are short term in nature designed to beef up the numbers. Conservatism becomes a causality and adventure the preferred option to keep reporting growth on a quarterly basis.

It is widely accepted that post 2013 the boards and committees of the boards of listed companies are spending disproportionate time in matters relating to accounts, audit and compliance and less on critical issues of strategic importance, notably risk management

International trend

Several countries are examining and revisiting the purpose and result of reporting quarterly numbers. While the UK removed quarterly requirement in 2014 and moved to half-yearly reporting for public companies, there are already serious discussions going on in the US on the desirability of relaxing listed companies from reporting quarterly accounts and move to half- yearly reporting.

As recently as February 2020, Singapore had dispensed companies listed in the Singapore Stock Exchange from the requirement to file quarterly reports and has mandated the need to file only semi-annual reports. It appears the cost benefit of periodic reporting on quarterly basis is slowly shifting to a point that benefits are not commensurate with the rigour and costs of a quarterly reporting requirement.

Way forward

The pandemic has given us the chance to make all corrections in one go. First and foremost, it is best to move to half-yearly audit of accounts and reporting to all stakeholders. This must be accomplished by a full-fledged audit and not a limited review. As mentioned earlier, there are other ways to keep track of significant developments that are taking place in the company.

Moving to half-yearly accounts and reporting should not be viewed as retrograde in nature. On the other hand, it is forward looking keeping in mind the changing dynamics of the landscape in which business is going to be transacted from now on. It will free up a lot of time of the auditors and management and should also enhance the overall quality of the numbers that are reported.

The writer is a chartered accountant

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