President Donald Trump recently used Twitter to praise a business leader’s desire to reduce the number of times public companies must issue financial reports, from quarterly to twice annually, and asked the U.S. Securities and Exchange Commission (SEC) to study the frequency change.

In a tweet, Trump said he had asked top business leaders what needs to be done to improve business, and one told him to “stop quarterly reporting and go to a six-month system.” The change would allow for “greater flexibility and save money,” Trump said. In a statement, SEC Chairman Jay Clayton said the SEC’s Division of Corporation Finance has been studying public company reporting requirements, including the frequency of reporting.

Federal securities laws require public companies to submit quarterly and annual financial reports. The quarterly report, or Form 10-Q, must be submitted for each of the first three fiscal quarters of a company’s fiscal year within 40 or 45 days of the end of each fiscal quarter. The annual report, or Form 10-K, must be filed within 60 or 75 days of the end of a company’s fiscal year. The variation in the filing deadlines depends on the market value of a company’s shares that are held by public investors, and this is known as public float.

Public companies that don’t meet filing deadlines can receive extensions under special circumstances, but it’s uncommon for a company to miss a deadline as this could impact a company’s ability to trade stock or raise capital in the market, said Barbara Marchini-Ellis, audit partner with Ernst & Young LLP (EY). The New York-based accounting firm with about 700 offices worldwide, including one in Rogers, is the registered public accounting firm for public companies such as Bentonville-based retailer Walmart, Lowell-based carrier J.B. Hunt Transport Services and Fort Smith-based ArcBest Corp., parent company of less-than-truckload carrier ABF Freight.

Most public companies set a cadence on when they release financial reports, Marchini-Ellis said. If financial reporting requirements are reduced to twice annually, the companies would be required to file financial reports semiannually, instead of quarterly.

“I think this is still in pretty early stages,” Marchini-Ellis said. “We view quarterly financial reporting as beneficial to the market.”

The existing way companies report offers important information to investors, she said. It’s uncertain whether reducing the frequency of reporting would lead to large cost savings for companies. It’s also uncertain what the impact would be on accounting firms, such as EY, which works with many large public companies all year long.

Transportation industry analyst Brad Delco, a managing director of Little Rock-based investment bank Stephens Inc., said he doesn’t believe there’s a public company that wouldn’t like changing the reporting frequency to twice a year. Financial reporting is a time-consuming process, and reducing its frequency would remove some of the burden. However, investors likely would not view the change in the same positive light.

“Earnings reports, in some regards, level the entire playing field amongst all different types of investors [individual, retail and institutional],” Delco said. “Everyone’s working with the same information, so having that occurrence four times a year [quarterly] versus only two times a year eliminates some advantages large institutional investors may have given their large in-house research budgets.”

If the reporting requirements were to change, it would likely increase the value of good sell-side research analysts, Delco said.

‘TUG-OF-WAR’
Alan Ellstrand, professor of management and associate dean for programs and research in the Sam M. Walton College of Business at the University of Arkansas, explained the reporting change would be a doubled-edged sword.

For companies, quarterly reporting is a disincentive to follow a long-term strategy because they are concerned about what they’re doing in a three-month period. They want their quarterly reports to look as good as possible because they have analysts to whom they are responsible and who are judging them. Removing two of the required reports annually would reduce the pressure by half in meeting those expectations and allow companies to focus on the big picture, Ellstrand said.

The positive is that it would remove some short-term pressure from companies, but the downside is it cuts into company transparency as investors want to learn about a company daily. Understanding a company’s financial health will be somewhat harder, he said.

Companies might save money on costs, but the savings would be small, Ellstrand said. The opportunity costs would allow employees to focus on other things instead of financial reporting. Also, stock prices might be more volatile with only two financial reporting periods “because there will be that much more change and information baked into a six-month earnings report as opposed to a three-month report,” he said.

Impacts to accounting firms are expected to be minimal depending on if an outside firm prepares reports or if they’re completed by company employees. However, annual audits could be more challenging with fewer reports, he said.

“I think that the investment community is going to push hard against this,” said Ellstrand, adding that he doesn’t believe companies are going to push strongly for it. “I think investors will be more emphatically opposed to it, and given that kind of tug-of-war, I would expect investors to win.”

Companies might appreciate reducing the frequency of reporting, he said, but it’s not a top priority for companies while the country is in the middle of a trade war and with other things happening.

LITTLE IMPACT
Jeff Williams, president and CEO of Bentonville-based America’s Car-Mart, said he doesn’t have a preference one way or the other and didn’t see any benefit or negatives on the frequency of reporting.

“This would have very little effect on Car-Mart as we will continue to be focused on the long-term regardless of the frequency of reporting,” Williams said. “We believe that we have communicated that message to the investor base and that they understand that it’s not about a good or a bad quarter, it’s about increasing value over the next five to 10 years and beyond.

“There might be some slight cost savings, but it would not be significant for us. Larger companies with a more broad investor base would see this as more significant. Investors will need information more than two times per year, so it will be interesting to see what that looks like if this moves forward.”

J.B. Hunt and Walmart didn’t respond to requests for comment on changing the financial reporting frequency, and Springdale-based meat producer Tyson Foods declined to comment.

The Trump administration is always thinking about ways to help business, Ellstrand said. The administration has worked to reduce regulations, taken steps to reduce taxes, foster a more favorable business environment and try to create more jobs. Studying the frequency of financial reporting is another example of Trump looking to help businesses be more successful.

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