Debate has been ongoing for some time now over whether reducing the periodic reporting requirements for companies from quarterly to semiannually could save them time and money. Some people have suggested that reducing the frequency of financial reporting would dissuade short-termism, as companies would no longer focus on meeting analysts’ expectations on a quarterly basis at the expense of long-term performance. This issue has also been debated in many regions of the world. For this reason, CFA Institute conducted a survey of its global membership on the topic as well as a roundtable discussion. Our report The Case for Quarterly and Environmental, Social, And Governance Reporting contains our key findings.
Investors Strongly Support Quarterly Reporting
The majority of survey respondents state that investors heavily rely on earnings releases because they are generally issued before quarterly financial reports. Over half the respondents, however, indicate that quarterly reports remain more important to investors than earnings releases. Respondents state quarterly reports are more useful to investors because they:
provide a structured information set that follows accounting standards and regulatory guidelines (72% of respondents);
include incremental financial statement disclosures and management discussion and analysis (91%); and
offer incremental information that compared with information in an earnings release can affect or change views about a company (75%).
In addition, quarterly reports offer greater investor protections because they
are certified by the officers of the company and subject companies to greater legal liability (65%); and
are reviewed by company auditors (71%).
As for timing, the majority (67%) of respondents believe quarterly reports and earnings releases should be provided simultaneously because this would reduce the significant amount of time spent reconciling the contents of earnings releases with those of quarterly reports as well as ensure that investors can ask better questions during earnings calls by having access to the more detailed information contained in the quarterly report. Roundtable participants agree with these positions.
Impact of Reducing Reporting Frequency
Some 64% of respondents feel that six months is too significant a time between earnings releases in the current market environment. Additionally, 51% of respondents feel that reducing reporting frequency will be less beneficial for investors because it will reduce the focus by management on events that should be reported to investors. Roundtable participants agree. They underscore that transparency is essential for the fair functioning of markets and that quarterly reporting should be a minimum requirement, particularly for a publicly traded company.
Information Needed for Smaller Companies
If small or private companies were exempted from quarterly reporting, investors in those companies would be particularly disadvantaged. Investors in such companies do not require less information. In fact, smaller reporting companies are the very companies that need quarterly reporting as they receive less media attention and have little or no coverage by research providers. High growth firms with a shorter track record and fewer investors scrutinizing operations are the exact types of firms for whom things can go wrong quickly. Investors in such companies require more information, not less.
Impact on Investment
Some 59% of respondents do not believe that reducing reporting frequency will significantly promote a long-term investment view. But investors do believe it would likely increase stock price volatility.
Quarterly reporting of financial information creates a level playing field for access to financial information between insiders and outside investors and shareowners and, ultimately, promotes greater investor confidence and improved capital allocation. Semiannual reporting is likely, we believe, to increase stock price volatility around earnings reports as there is greater likelihood of earnings surprises. For these reasons, CFA Institute does not support a move to semiannual reporting.
Sacrificing transparency could also lead to other problems, such as placing some investors at a greater information disadvantage, increasing the risk of insider trading as a result of information asymmetry, and allowing stock prices to diverge from fundamentals. Furthermore, quarterly reports not only inform investors of earnings but also provide updates of risks.
Focus Should Be on Incentive Structures
CFA Institute has long contended that when companies focus on long-term strategy, they are looking at a time horizon of three to five years or longer, not six months. Accordingly, extending the reporting period from three to six months would have little impact. We believe that a better approach to deterring short-termism would be to focus on companies’ incentive structures. Companies interested in encouraging a long-term view should consider adopting five-year performance periods in their incentive plans. In addition to incentives, general corporate leadership, tone at the top, and company culture are important contributors to long- vs. short-termism.
Mohini Singh, ACA, is a director in the Financial Reporting Policy Group at CFA Institute. Her responsibilities include representing membership interests regarding financial reporting proposals of the IASB, FASB and other regulators. She drafts comment letters and position papers. In addition, she serves on the IAASB consultative advisory group, the IESBA consultative advisory group, the XBRL US data quality committee, and the Appraisal Issues Task Force. Most recently served as the Global Accounting Analyst leading CFA Institute’s IFRS implementation effort. Prior to joining CFA Institute, Ms. Singh served as a Policy Advisor for the Institute of International Finance where she worked on international policy initiatives in the areas of financial reporting and audit. She was General Manager and Financial Controller of Disha, a service organization dedicated to development programs for the underprivileged, and an audit manager at KPMG supervising audits and conducting due diligence reviews.
She is an ACA and is a member of the Institute of Chartered Accountants in England and Wales.