SEC Proposal to Re-invent Quarterly Reporting
The SEC issued a Concept Release in December 2018 focused on interim reporting by US companies (the “Concept Release”.) Concept releases are issued to obtain input regarding the need for future rulemaking. Some concept releases lead to new or amended rules. Others do not.
The SEC has raised questions about interim reporting at least twice in the past 10 years, first via an SEC Advisory Committee in 2008 and subsequently in a 2016 Concept Release on improvements to business and financial disclosures. Neither of those inquiries led to rule changes in the area of quarterly reporting. According to the business press, this most recent examination of quarterly reporting stems from a White House request.
The SEC has rules that prescribe the form, content and due date for quarterly reports which are filed on Form 10-Q. Most readers are likely very familiar with these filings.
In addition to filing Form 10-Q reports, many US public companies voluntarily issue earnings releases and/or host conference calls to discuss quarterly results. Some companies also provide earnings guidance. These disclosures typically precede the filing of a Form 10-Q. Other than requiring that disclosures not be materially misleading, the SEC does not regulate earnings releases or conference calls.
Some believe that quarterly reporting is burdensome on public companies and that the information needs of investors can be met in other ways. Others suggest that frequent reporting pushes management to make decisions that place a premium on short-term results at the expense of long-term growth and profitability (so-called “short-termism”). The fact that some other countries’ capital markets are less demanding in their reporting requirements is mentioned as evidence that the US quarterly reporting scheme is unnecessarily onerous.
With the objective of reducing costs while maintaining investor protections, the Concept Release asks questions about interim financial disclosures in the three areas:
The content of quarterly reports
- Whether to integrate the quarterly report and earnings release
- Whether certain requirements, such as XBRL and auditor review, are important to investors
The frequency of interim reports
- Whether to move to a semi-annual reporting model
- Whether to permit registrants flexibility as to the frequency of periodic reporting
The effect of interim reports on corporate decision making
Listed companies in the US have been providing quarterly financial information to investors for more than 50 years. Examining the regulations governing this mainstay of financial reporting is a healthy process. It also deserves our careful consideration.
In this A Closer Look we explore:
- How the current rules and disclosure practices have evolved;
- What the Commission appears to be considering and why;
- How various constituencies – investors, public companies, auditors, lawyers – view potential changes to our current quarterly reporting framework; and
- Next steps and our sense of where this Concept Release may lead.
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