Wednesday, August 17, 2011

Accountants call for timely disclosure

A Reuter's article highlighted how accounting experts are frustrated with the frequency of disclosure and are pushing for more timely disclosure.  Regular readers will find their argument for daily disclosure very familiar.
Author and lawyer Michael Young jokes about the days when it took more time to get some companies' financial statements than it did for Columbus to discover America. 
Alas, those days are still here. 
In an age of lightning-fast stock trades and instant communications, yearly and quarterly financial reports seem stuck on an industrial-era pace that some say was obsolete decades ago. 
"Financial reporting technology allows all sorts of possibilities about which we could not even fantasize back in the Great Depression when our periodic system was put in place," said Young, a partner at law firm Willkie Farr & Gallagher. 
Young and other accounting experts have long called for a move to real-time, online reports in lieu of quarterly earnings statements that investors now use to decide whether to buy stocks. 
An example of the the information that could be reported for financial institutions are their current assets and liability-level data.
Cheap computing power has made real-time reports more technically feasible, but advocates still struggle to draw wide support for the idea....
"Almost any company with rational management tracks its performance daily and makes critical business decisions on the basis of data and trends that should be distilled and published for public consumption," said Harvey Pitt, former chairman of the Securities and Exchange Commission. 
This is particularly true of financial institutions.  
... Free, open-source software has allowed even much smaller companies to construct dashboard-like digital displays that continuously track sales, orders and other key figures. 
That kind of data could help make the stock market much more transparent, said Paul Miller, a University of Colorado accounting professor. 
"If I'm an investor, why can't I go on the Web and see what the Wal-Mart sales are today?" Miller asked. 
Instead, investors have to wait to find out what happened months ago. 
"It's a constant state of incomplete information and the consequence of that incompleteness is discounted stock prices, which means a higher cost of capital," he added. 
For financial institutions, the consequence of incompleteness is no one knows who is solvent and who is not solvent.
... Eventually, some companies may embrace real-time disclosures to build more trust in the capital markets, said W. David Stephenson, a homeland security expert and author of Data Dynamite, a book about data sharing. 
"I do think that quarterly reporting is going to become an artifact at some point and that it's going to start with some companies -- maybe banks -- that have a particular credibility problem," he said. 
Please reread Mr. Stephenson's quote as he makes the point that more and better disclosure is directly related to more and better credibility in the capital markets.
..."It would obviously be a headache for investors to try to process financial information on a daily basis, but what a real-time system would allow investors to do is step back and say to themselves: 'What period of analysis for this particular company makes sense?'" said Young, the lawyer at Willkie Farr. 
Actually, it is not difficult for investors to try to process financial information on a daily basis.  They do this all the time - think security prices.

More importantly, investors would let their computers do the processing (computers do not get a headache) and highlight the information that is relevant for the investor to look at.
More real-time reporting might also result in smaller gyrations in a company's share price because investors could adjust their expectations each day, he said. 
This is another critical point.  With daily reporting, markets can adjust over time and not in a short time period.

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