For decades, quarterly financial reporting has provided the cornerstone for fair, efficient and well-functioning markets. However, President Trump recently posted on social media that public companies should move to semiannual financial reporting. He believes changing the frequency would lower compliance costs and allow management to focus less on meeting short-term earnings targets and more on building long-term value. But critics say less frequent reporting could result in information gaps and increased market volatility.
While no changes have been made to the U.S. Securities and Exchange Commission’s (SEC’s) filing requirements, Trump’s statement reignites the debate over how often companies should issue their financials. While his post centered on public companies, reporting frequency can also be an important issue for private companies, particularly in today’s uncertain markets.
From Wall Street to Main Street
The SEC requires public companies to file annual reports on Form 10-K and quarterly reports on Form 10-Q on an ongoing basis. The quarterly requirement, in place since 1970, was designed to promote transparency and strengthen investor confidence.
Private companies aren’t required to follow SEC rules, so most issue financial statements only at year end. More frequent reporting is usually discretionary, but it can sometimes be a smart idea. For example, a large private business might decide to issue quarterly statements if it’s considering a public offering or thinking about merging with a public company. Or a business that’s in violation of its loan covenants or otherwise experiencing financial distress may decide to (or be required to) issue more frequent reports.
Midyear assessment
Financial statements present a company’s financial condition at one point in time. When companies report only year-end results, investors, lenders and other stakeholders are left in the dark until the next year. Sometimes, they may want more frequent “snapshots” of financial performance.
Whether quarterly, semiannual or monthly, interim financial statements can provide advanced notice of financial distress due to the loss of a major customer, significant uncollectible accounts receivable, fraud or other circumstances. They also might confirm that a turnaround plan appears successful or that a start-up has finally achieved profits.
Management can benefit from interim reporting, too. Benchmarking interim reports against the same period from the prior year (or against budgeted figures) can help ensure your company meets its financial goals for the year. If your company is underperforming, it may call for corrective measures to improve cash flow and/or updated financial forecasts.
Quality matters
While interim reporting may provide some insight into a company’s year-to-date performance, it’s important to understand the potential shortcomings of these reports. This can help minimize the risk of year-end surprises.
First, unless an outside accounting firm reviews or audits your interim statements, the amounts reported may not conform to U.S. Generally Accepted Accounting Principles (GAAP). Absent external oversight, they may contain mistakes and unverified balances and exclude adjustments for accounting estimates, missing transactions and footnote disclosures. Moreover, leaders with negative news to report may be tempted to artificially inflate revenue and profits in interim reports.
When reviewing interim reports, outside stakeholders may ask questions to assess the skills of accounting personnel and the adequacy of year-to-date accounting procedures. Some may even inquire about the journal entries external auditors made to adjust last year’s preliminary numbers to the final results. This provides insight into potential adjustments that would be needed to make the interim numbers conform to GAAP. Journal entries often recur annually, so a list of adjusting journal entries can help identify which accounts your controller or CFO has the best handle on.
In addition, interim reporting can sometimes be misleading for seasonal businesses. For example, if your business experiences operating peaks and troughs throughout the year, you can’t multiply quarterly profits by four to reliably predict year-end performance. For seasonal operations, it might make more sense to compare last year’s monthly (or quarterly) results to the current year-to-date numbers.
Digging deeper
If interim statements reveal irregularities, stakeholders might ask your company to hire a CPA firm to conduct agreed-upon procedures. These procedures target high-risk account balances or those previously adjusted by auditors.
Agreed-upon procedures engagements may give your stakeholders greater confidence in your interim results. For instance, agreed-upon procedures reports can help identify sources for any irregularities, evaluate your company’s ability to service debt and address concerns that management could be cooking the books.
Find your reporting rhythm
Currently, public companies must issue financial reports each quarter. However, private companies generally have more discretion over how often they issue reports and the level of assurance provided. What’s appropriate for your situation depends on various factors, including your company’s resources, management’s needs and the expectations of outside stakeholders. Contact us for more information about reporting interim results, evaluating midyear concerns and conducting agreed-upon procedures.
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