By Mike McNamee
What do investors want most as Enron, Global Crossing, Kmart and a host of other companies are investigated for playing games with their numbers? Better information, so that those willing to do their homework can be sure they won't walk into another corporate tar pit. And given a choice between more reliable information and faster reporting, most would likely opt for quality over speed. But that's not the way the Securities & Exchange Commission sees it.
As a part of Washington's response to the corporate crime wave, SEC Chairman Harvey L. Pitt wants companies to deliver quarterly reports known as 10-Qs to the SEC 30 days after a quarter closes, down from the current 45. To Pitt, that's a vital step toward better informing investors about their stocks' health and alerting markets to corporate shenanigans.
But faster isn't always better. The SEC proposal is likely to mean that time-pressed companies will give investors half-baked analysis, not clearer disclosure. At the same time, the agency is ignoring the No. 1 source of corporate misinformation: earnings press releases, in which executives are allowed to abandon sound accounting in favor of selective hype.
Pitt's instincts are right, but his plans are contradictory. Under one post-Enron proposal, his SEC is calling for companies to pack more into the official 10-Q quarterly and 10-K annual reports they file with the SEC. Pitt wants more disclosure of off-balance-sheet financing, critical accounting policies, and management's view of how a business is faring beyond the numbers.
Investors would welcome richer, fuller disclosures. The question is whether they will actually get it--especially if, as the SEC proposes under a separate rule, the agency cuts by one-third the time companies have to prepare all this analysis. Chief financial officers say they might manage to deliver annual reports to meet a 60-day deadline, down from the current 90, but that 30 days just isn't enough for quarterly reports. "We're all for additional value-added disclosure," says Stephen P. Wolfe, CFO of Toro Co. in Bloomington, Minn. "But doing more of that on a shorter timetable is inconsistent."
Meanwhile, the SEC isn't focusing on the real issue: misleading earnings press releases. Those releases, which usually come out 14 to 30 days after a quarter's end, aren't required to follow standard accounting principles. That allows companies to put the best spin on performance. "Markets are trading on the pro forma numbers that management presents--and then weeks or a month later, we get the full story," says Craig S. Tyle, general counsel of the Investment Company Institute, which represents mutual funds. "We need better data the first time."
Getting rid of the creative writing would help. At a minimum, ICI says, the SEC should require companies that use pro forma earnings to also provide an income statement prepared under generally accepted accounting principles (GAAP). Gale E. Klappa, CFO of Atlanta-based Southern Co., would go further: The SEC should set standards for the income, balance-sheet, and shareholder equity data required in earnings releases. The New York Stock Exchange, too, is calling on the SEC to require companies to put out GAAP-based financials before they can offer up pro forma numbers.
Pitt & Co. say they don't have the authority to dictate the content of press releases. Instead, they say they can only crack down after companies provide fraudulent data. But that's a hollow argument: The SEC constantly regulates communications in the markets.
Beefing up press releases might delay earnings announcements--but only by a few days. That's a small price to pay for honest information. And if markets get straight data from the start, investors could afford to wait until 45 days after the quarter's end to get the hard-to-prepare nitty-gritty that companies are required to put in footnotes and management analysis. Companies can use the time to ensure that their 10-Qs provide real disclosure--not just boilerplate. That, rather than a token speed-up in SEC filings, will do the most to meet investors' real needs.
McNamee covers the SEC in Washington.