Financials — To Report or not to Report
Financial reports are the end result of the accounting process and often help determine the movement of stock prices. In essence, financial reports have the potential to build or destroy companies, especially those, which are looking for investors in the financial markets.
The International Accounting Standards Board (IASB) lays common standards for publishing the financial reports so that they provide comprehensive and timely details of the company finance information. Though all companies publish their annual financial reports, the IAS and other accounting bodies are encouraging companies to publish reports on a half yearly or quarterly duration. Such reports are termed as interim financial reports. These reports contain either a complete or a condensed set of financial statements for a period shorter than an enterprise's full financial year.
If any investor analyzes the company's interim reports, the investor would be able to forecast the enterprise performance and make investment decisions accordingly.
Though most agree that the interim reports do provide necessary information that would enable investors to make better decisions, the periodicity of the reports is a much- debated issue. There is also some disagreement between companies and the investors too. Investors feel that quarterly reports are a must to enable informed investment decisions while companies contend that annual or at best half yearly reports adequately serve the purpose. There is a general perception that quarterly reports are a waste of effort and may lead to speculative investments.
The most obvious problem with quarterly reporting seems to be the additional time and resources that companies have to spend to prepare the quarterly financial statements. However, this seems to be the least of the concerns being expressed by the business community. It is only small businesses that will feel a resource crunch while preparing quarterly statements.
The primary issue against quarterly reporting is that this kind of reporting will increase short-term investment mentality of investors leading to speculative buying and selling of stock resulting in imbalances in the market.
The accounting scandals in U.S. are another point that is raised against a quarterly reporting model, because even though the US regulations force the companies to publish quarterly reports, this could not have prevented the Enron and WorldCom accounting scandals. The people opposing quarterly reporting feel that for an investor, the quality of reporting and not the frequency of reporting is important. Many also argue that the Enron and WorldCom scandals have their roots in the 'short-termism' that stems from quarterly reporting where company executives are put under pressure to show results every three months.
Another example of growing opposition against quarterly reporting is the stance of London Stock Exchange (LSE). The LSE states that while it is not against quarterly reporting per se, it is also not in favor of mandatory quarterly reporting. It feels that the current six-monthly reporting and continuous disclosure requirements are sufficient to ensure the disclosure of material information.
Quarterly reporting has also caused controversy elsewhere, notably with German carmaker Porsche withdrawing from Germany's MDax index rather than submit to the quarterly reporting regime.There is a general feeling gathering momentum among corporate circles, that the system of quarterly results has increased market volatility.
Though there are a lot of negatives against quarterly reporting, agencies and authorities all over the world are pushing towards making the quarterly reporting of financial situation of a company mandatory. Quarterly reporting would provide a more rapid update on a company's progress. In today's competitive environment prone to technological changes, this may be a boon to the investors. It would be particularly useful in cases where the industry may be stable, but end-user industry situation is volatile.
Another positive of quarterly reporting is that in general the industry by nature is capital-intensive, annual balance sheets in general have low reserves and more debt, thus the cash flow situation depicted by quarterly reports becomes very important. The quarterly results can also be used to declare interim dividends in cases when companies have excess liquidity and wish to impart the dividend so that the load at the end on the financial year reduces.
The quarterly reports also enable the company to continuously review its product and portfolio performance. Many times the products offered are subjected to seasonal fluctuations and tracking these trends on yearly basis might jeopardize company's growth and market share.
Amidst all the pros and cons of quarterly reporting, the best solution might be the middle way as suggested by the European Commission. Compared to current practice in the U.S. the EC has opted for less demanding publication periods and a more pragmatic mix of more detailed half-yearly financial reports and light, but reliable, quarterly financial information. They feel that this is the minimum modern that capital markets need to attract more investment from more people.
This would give the public swifter and better information about the material interests of important shareholders. The disclosure of issuers' shareholding structures within quarterly time limits would enable the investors to assess future returns better.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.