SEC to re-examine quarterly reporting
The commission will study President Trump’s proposal
Securities and Exchange Commission Chairman Jay Clayton said the SEC is looking at a proposal from President Trump to change the quarterly financial reporting cycle for public companies.
In August, Trump tweeted, “In speaking with some of the world’s top business leaders, I asked what it is that would make business ( jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!”
Clayton indicated that the SEC is taking the proposal seriously. “The president was right to raise this issue,” he said during Financial Executives International’s Current Financial Reporting Issues conference in New York. “He touched a nerve because I don’t think any of us want our very important private sector enterprises to be run on a short-term quarter-to-quarter basis. That’s important. I hope that most management teams have a strategic plan that goes out two, three or four years and are looking to invest over that horizon. Look, there are people in this room that have industries where your investment horizon is 10, 15, 20 years. You can’t be running your organization for December 31 of this year exclusively.”
However, Clayton also pointed to some of the benefits of quarterly reporting for investors. “That said, you can see the other side of it, which is that our capital markets thirst for information,” he said. “They thirst for reliable, comparable, regular information. That’s a reality. So the president raised a very good point, and we’re looking at it.”
Clayton noted that oftentimes, investors pay more attention to the earnings press releases than the 10-Q quarterly financial reports and 10-K annual reports.
“I can give you some observations that are informing the way I think about it,” he said. “You go through the Q process [four] times a year and then the K process. There was a time when in many cases the earnings release would come out before the Q. If the stock moved after the Q came out and not when the earnings release came out, you had a big problem. You had a huge problem, which meant really all of the quarterly information that was necessary for the market was in the earnings release. So one of the questions I’ve been asking myself is do we need that Q process every quarter, or do we need it every six months with something that is less voluminous, but still provides all of the quality information that investors need? It’s a good question, but in terms of a quarterly reporting cycle, I think we all have to recognize that whether it’s your credit agreement or indentures, all of these other parts of your corporate ecosystem, they’re based around this concept. But I very much support the president’s question of are we managing too much for the short term and what can we do about it?”
SEC chief accountant Wesley Bricker noted that the question of dispensing with quarterly financial reports has been on the SEC’S radar for years now, pre-dating Trump’s tweet.
“This has been on an agenda through the Reg S-K concept release where we got valuable input in 2015,” he said during a press conference. “That input in 2015 has contributed to our thinking on our Regulatory Flexibility Agenda, which is where the commission and all other government agencies describe their outlook for the next 12 months. On that agenda, which is available online, it includes an entry for looking at the frequency of reporting and the nature of internal reporting. That’s designed as a request for comment, not a specific proposal, and certainly not a final rule. It’s a request for comment to continue to gather input from how the balancing of information in our marketplace and the thirst for information has changed with the duplication that may arise with an earnings release and a 10-Q quarterly filing.”
Tax reform guidance
Clayton and Bricker also discussed how companies have been providing other disclosures, including how they responded to the SEC’S Staff Accounting Bulletin No. 118, which came out shortly after the Tax Cuts and Jobs Act passed last December. It offered guidance on how companies could account for income taxes after the far-reaching changes in the corporate tax code under the legislation.
“For many of you, you understand related to the timely disclosure of information about income taxes, particularly where income tax law had changed days before many companies were closing their books,” said Bricker. “So the way we thought through that circumstance was balancing how to get timely information to the marketplace consistent with the normal reporting cycle, but also to reflect the practicability of getting the change in tax law digested into the accounting records. So I think the approach they landed on was one of letting management describe to the marketplace where they are.”
Clayton praised the work of the SEC’S Office of the Chief Accountant and the Division of Corporation Finance in releasing the guidance on the new tax law.
“It happened right near the end of the year, and they came out with guidance very quickly, and the guidance had this very practical element to it,” he said. “It was ‘OK, you know the rules, you know the calculations are going to be difficult, but we expect you to do what you can reasonably do in the time allotted for it, and inform us along the way of how you’re looking at it.’ That’s pretty simple, but it