My comments in colour.
The Securities Commission's (SC) recommendation for listed firms to disclose their financial reports on a half-yearly basis, instead of quarterly, drew mixed reactions yesterday.
Those for the move said it is about time Malaysia moves in that direction as quarterly reporting tends to promote short-term views.
They also believe that with companies under pressure to show good numbers on a frequent basis, there could be temptation to tweak the results. As it stands, quarterly results need not be audited by an external auditor.
Those against the move, however, said they prefer having the reports as frequently as possible, especially in uncertain economic times as it helps investors make better investment decisions.
Tan Sri Krishnan Tan, executive deputy chairman of IJM Corp Bhd, said it is becoming "absurd" to put out financial reports every quarter as it isn't a fair reflection of how the company may be doing.
The plan for half-yearly reporting was included in the blueprint, along with another, to shorten the timeframe for companies to submit their financial reports.
Currently, companies have to disclose their quarterly financial reports within two months from the end of every financial quarter.
Malaysia first introduced quarterly reporting in 1999 to bring back investor confidence in the aftermath of the Asian financial crisis.
Over the years, however, the merits of quarterly reporting have been debated, with some arguing that a quarter may not be long enough a period to draw a conclusion about a company's financial position or performance.
"While quarterly reporting had been useful in terms of restoring investor confidence ... a comprehensive review will be undertaken on the periodic submission of financial reports, with a focus on whether to retain the current practice of quar-terly reporting," SC chairman Tan Sri Zarinah Anwar said.
Countries like the UK, Australia, New Zealand and Hong Kong require their companies to report on a half-yearly basis.
Raymond Tang, chief investment officer of fund management firm CIMB-Principal Asset Management Bhd, thinks it is a good move to do away with quarterly reporting as firms will have more time "to run their business" rather than "scramble" to put out reports.
"It will also allow fund managers and analysts more time to go and meet the company (management) to do their analysis ... a lot of times, they have to wait because of the blackout period (during which the company can't talk until the results are out)," he remarked.
He suggested that companies hold quarterly briefings to give investors a "snapshot" on how they are doing, rather than issue financial reports.
(Yes, quarterly reporting yields more cons than pros. QR causes analysts to over-concentrate on the matter of earnings estimates on a quarter to quarter basis, which paralyses many trying to adopt a more cohesive appreciation of how a company is strategising itself in the shape industry evolvements.
To even put an estimate on quarterly figures is already too limiting to offer a proper perspective. You can do a q-on-q trend which in itself may say something but not much. You will have q-on-q that says up, then flat, then up then down ... what would you comment on that. A better analysis may be year-on-year quarterly comparisons, which is looking at say Q2 2011 and comparing to Q2 2010, that would strip out seasonal effects - still its looking at a lot of silly numbers that is akin to grabbing a handful of sand from a large pail.
You get the accounting staff rushing from one quarter to another, trying to make the deadlines. Its a lot of wasted resources. Accounting function should be used in a more proactive way, rather than just tabulation of figures. A forward looking company should use accounting to look at various products / units on how they have used capital to generate returns, as an example. Other proactive usage of accounting may include looking at the way taxes could be minimised; looking at how reserves could be utilised properly; reworking the balance sheet for corporate exercises; setting stretch KPIs relevant for each product or unit; advising on tax / dividends / bonus / reserves / treasury shares / buyback policies / dividend policies / short and long term liabilities strategy / hedging of exposures / etc. To do quarterlies certainly takes away at least 1/3 of the resources of any accounting function of a listed firm.
In bigger capitalised markets such as the US, the hedge funds are very keen to promote QR because they need every advantage they can get to sell short or go long for a quick trade. Do we need to help promote that kind of trading activity? GE was famous for once having no down quarters for years - i.e. every quarter's profit was higher than the previous. What that means to me is a lot of effort would have gone into "earnings management" or massaging earnings from quarter to quarter to smooth out an uptrend, under reporting some and forward reporting some to achieve whatever picture you want. We all know that is not a good practice, over the long term.
What RULES and REGULATIONS we promote, will affect how companies react to those rules and regulations. If you continue to have QR, then they will have to do QR. Remove that, then they do not have to worry so much about taking a big investing decision which may hit some quarter's results but is beneficial for the longer term. They may also take a less aggressive approach to hedge stuff so as to not be hit excessively by volatility in commodities or currencies).
Meanwhile, there didn't seem to be much industry support for an SC suggestion that companies take less time to submit their financial reports, a move meant to ensure that investors receive critical information in a timely manner.
Currently, the timeframe for the submission of quarterly and annual reports is two and six months respectively.
Zarinah said the best practice time frame in other markets is 45 days and two months, respectively.
(The current 2 and 6 months is way outdated and does not provide a quick enough turnaround for investors to assess the information. What we have are largely outdated and unusable. I would suggest that QR be done away, and just have half yearlies and annuals. The submission time should be just 30 days and 2 months respectively. 30 days seemed more of a stretch for some companies, but seriously, the benchmarks we set says a lot about how we want the listed companies to perform. Its like telling an 18 year old that if he can run 100m in 18 seconds, he is good. But if you set it at 16 seconds, he will probably get there as well.
30 days is not a number plucked out of nowhere. Top companies have always boasted that they can CLOSE THEIR ACCOUNTS and get the final tabulations within 2-3 days. Can any of our listed companies do that? Why not?
Because there hasn't been a push for it. I know for a fact that there are a few locally listed companies that can do that, and they are superior performers. Why would you wnat to do that? If you can close your books and get tabulations within 2-3 days, it literally means that:
a) you have a well planned and timely reporting schedule that every unit adheres to religiously
b) it shows how much the CEO/CFO places importance on financial numbers tracking, those tracking them closely are not kiasu but are diligent as they want to spot "issues" or "problems" before they escalate
c) top management has a high degree of respect, reliance on financials and would also impart measures to instill checks and balances so that the figures are also filled with integrity and transparency
The whole thing about financial reporting and management goes down the line, and all employees would be shaped to respect the integrity and importance of coming up with those figures).
"I think it will be a challenge ... not all companies are financial institutions that do balancing every day. Also, there will be enormous pressure on auditors (who will have to audit the annual accounts)," IJM's Tan said.
Datuk Johan Raslan, executive chairman of PricewaterhouseCoopers Malaysia, agreed that it would put tremendous pressure on auditors, especially given the brain-drain situation in the accounting industry in Malaysia.
(I don't think there is a lack of accountants in the country. There may be too many greedy accounting partners at the top, inhibiting the payscale for graduates and senior accountants. I think the industry can pass on any additional cost of higher wages, its not that debilitating. The partners should worry less about not getting their RM2-3m annual pay and profit share packages. I believe there is too much fat at the top at the expense of the cogs and wheels of our accounting industry. Any partners want to reveal their pay packages and try to convince the rest that they are not being greedy???).
More and more Malaysian accountants are leaving the country to work in neighbouring countries that pay better, he said. This essentially leaves less people to do more work.
"I would recommend that we stick to the current regime until we have sorted out the level of the income for accountants and the brain-drain issue," he said, when met at the launch.
Zarinah, meanwhile, assured that the SC would not implement this without first listening to industry feedback.
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