Is The Quarterly Report Really a Thing?

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Quarterly earnings reports have been a fixture of American business for more than 50 years … but are their days numbered? Earlier this month, President Donald Trump reignited debate by suggesting companies should only report twice a year, a move he says would cut costs and free executives to focus on the long term. But would fewer reports build stronger businesses, or erode trust in the markets? In this episode of Is This Really a Thing?, Dean Paul Jarley sits down with UCF College of Business Hall of Fame members Paul Gregg and Jim Balaschak, along with accounting faculty member EB Altiero Poziemski, to examine whether the quarterly report is an outdated ritual or a critical safeguard. Could its demise really be a thing?

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Episode Transcription

Paul Jarley: Sometimes things just come together. Last week I read something about the President’s proposal to shift from quarterly to semi-annual earnings reports. That same week I was holding the College’s fall meeting of our Dean’s Advisory Board. The Board is filled with folks who have a direct interest in this debate. So I convened a quick panel to gain insights into the likely death of the quarterly report. Paul Gregg is an experienced CFO, member of the College of Business Hall of Fame and an Executive in Residence in the Department of Finance. He is joined by Jim Balaschak, a fellow Hall of Famer and serial investor, and EB Altiero Poziemski, a faculty member in the Dixon School of Accounting. Quarterly earnings reports have been with us for 50 years. President Trump has floated the idea of going European and cutting back to semi-annual reporting. Would that save money, destroy trust in markets or both? And what happens when AI makes real time disclosure possible? In this episode, we ask whether the cadence of reporting is about efficiency or about faith in the system itself. Could the end of the quarterly earnings report really be a thing? Stay tuned.

This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, Is This Really a Thing? Onto our show.

EB, let me start with you. Talk a little bit about when the quarterly report first came about and why, and the changes over the years.

EB Altiero Poziemski: The requirement to actually have any financial reporting whatsoever from our public companies started with the Securities and Exchange Act of 1934. So that was the first time that there was a law that said a publicly traded company had to periodically report their results to their investors.

Paul Jarley: This was a response that Great Depression, right?

EB Altiero Poziemski: Yes. Following on that, in 1955, that was when the requirement for semi-annual reports was added to the rules, and so we saw that sometime between the original 1934 act and 1955, there was an increased demand for more timely information about these companies. And then from there, we didn’t see quarterly reporting required until 1970. So in the grand scheme of things, it’s actually a fairly recent development and not entirely a settled one either because we’re here talking about it right now. But Donald Trump also brought this up in 2018, actually brought it to the SEC for comment. It did go out for public comment at that time, and in 2013, the European Union actually abolished quarterly reporting for the companies that they regulate. So it’s been kind of a push and pull over time.

Paul Jarley: Paul, you’ve been in the corporate world for a lot of years, what actually do you need to report?

Paul Gregg: First of all, the report is unaudited, unlike the 10-K, which is an audited report. And you have to report your balance sheet, income statement, cashflow statement, along with selected disclosures. And of course, if there are material events, they typically show up at that point. Although an 8-K is required if there’s a material event between reporting periods. So it’s basically producing your financial statements and it’s kind of morphed into where the analysts are going to meet with the company. After these 10-Q’s are produced, the press release will go out, the company would then go over the results for the quarter. The analysts are tracking the quarterly results against their forecast that are not looking for surprises. Typically, the company tends to guide during this period, what the remaining year will be.

And there’s some pros and cons to reducing the quarterly reporting to semi-annual. The pro would be we can save on audit fees because our auditors come in and review these quarterly reports and it allows the company to think more long term. Having said that, those slides and that data that is shown to the analyst is done every month for the Board of Directors. It’s not like we have to make this stuff up. It’s already there lots more detailed than we show the public, and so it really isn’t that much more work for management to report. The only out-of-pocket cost really is the biggest, the audit fee.

The bigger issue is that by forcing companies to report quarterly, it flushes out information that has to be shown in the financial statements before the quarter end. The way it works in a corporate world, bad news travels very slow, good news travels quickly. So, it’s a way to force out the bad news to make sure we get it into the public arena. You never want to surprise Wall Street with a surprise report. And so if it were to be twice a year, that would basically be six months of perhaps data that should have the actions management problems that should be addressed. So those problems may not be addressed as quickly because they’re not known as quickly. This quarterly reporting kind of forces them out sooner than later, and of course it’s going to create volatility in the stock. It’s going to create bigger variations. When semi-annual reporting is done, that’s going to add volatility, which adds to the cost of capital.

Paul Jarley: Because people are guessing more on what’s going on. Is that where the volatility will come from?

Paul Gregg: Their forecast would be less accurate, just like the company would not know for six months of what’s going on, a lot can happen in a quarter.

Paul Jarley: I imagine, Paul, the typical CEO doesn’t really love the forecast meeting.

Paul Gregg: They certainly don’t like going to Wall Street and presenting the quarterly results unless they’re good, in which case that’s enjoyable. But if they’re not good, they’re going to get a lot of questions. The stock can actually start moving during these quarterly earnings and conference calls. If the information is not really known or worse than expected, better than expected, it is a drill. We would prepare a book and anticipate every question. We give each person, “If this question comes up, this is how we’re going to answer it.” Ours were pretty well orchestrated and we generally did not have problems, although, I’ve seen really good webcasts on quarterly reviews and I’ve seen some that are not so good. So it just depends on the company and how well they’re managed and how accurate their numbers are.

Paul Jarley: And there’s also some game playing right around when to book revenue or is that overstated?

Paul Gregg: We manage earnings, but we manage it within generally accepted accounting principles. So during the quarterly review, if we took some positions on something that affected earnings, I would discuss it with our auditors. During the quarterly review. I was telling EB, our chairman of the Audit Committee was a former Chairman of the SEC. Anything we did, I’d be ready to go tell him why we did it and why it was consistent with GAP and why it was appropriate. Revenue is a common problem though for many companies and revenue recognition.

Paul Jarley: Jim, you’re an investor. What do you think about this?

Jim Balaschak: I like the current system. I like to hear the quarterly earnings. I do my analysis on what is projected for the next quarter and the one after that, and one after that. Usually I’m looking about two years out of earnings and earnings growth. I like to buy growth companies and the economy can change, the sector can change. I’d like to know about that sooner than later. Also, I know that a lot of the European companies, not only do they report semi-annually, their dividends are semi-annually. And I think there’s a lot of income investors out there that count on that quarterly dividend. So I would think that if companies start reporting only every six months, that many of them would start changing their dividends every six months.

Paul Jarley: EB have there been any studies done on firm behavior and investor behavior in Europe when they made the change?

EB Altiero Poziemski: There was a study done on German firms that showed those who opted to go ahead and switch to semi-annual instead of the quarterly requirement, they actually saw a increase in their cost of capital and an increase in the information asymmetry. So basically the investors, again, weren’t as well-informed, weren’t willing to take as much risk. Basically they were demanding a bigger return because they were perceiving a bigger risk.

Paul Jarley: So there might be a signal in choosing six months rather than four months, which might be negatively perceived by them?

Paul Gregg: Exactly, which adds to the volatility of the stock, which adds to the cost of capital.

Paul Jarley: And let’s understand that even if the SEC did relax the rule, a number of firms might not do it anyway, right? So the stock exchange itself could require quarterly reports, right, to list the stock on the stock market?

EB Altiero Poziemski: So in the UK, only 9% of firms actually decided to make the switch. So they were given the option to drop quarterly reporting and they didn’t do it. And so there is the chance that even though the requirement goes away, firms are still going to choose to do this because their investors are demanding this information.

Paul Gregg: All it takes is Fidelity, Vanguard, some of the big shareholders to say, look, we want this quarterly, we’d do it. I don’t care what the SEC says. If our big shareholders are asking for it, we’re going to do it, but that’s our audience. That’s who we want to please.

EB Altiero Poziemski: We do run the risk though of that information being less reliable if it’s voluntary, if there aren’t rules around it and it’s no longer being reviewed by the auditors.

Paul Jarley: I assume that the audit community would be against this. Is that fair to say?

EB Altiero Poziemski: I think that’s fair to say. I think the audit community, generally speaking, always thinks they should be looking at everything. And also it does help with some of the analytic procedures that they do. Some of those work better when they’re done quarterly, especially the fraud detection analytical procedures. There was a study by the Association of Certified Fraud Examiners in 2020 that said that financial statement fraud has a median loss of $1.25 million per case and take up to 19 months to detect even with quarterly reporting in place. So without that quarterly reporting in place, it could take even longer to see the patterns and uncover that fraudulent reporting.

Paul Gregg: I would think the audit committee would want the quarterly reporting just from their due diligence and fiduciary responsibility. You know, they have a lot at stake here, so they’re not likely to want to give up the quarterly reviews even if you didn’t have to.

Paul Jarley: So the impact on cost for the organization would be fairly minimal.

Paul Gregg: Absolute incremental costs would be minor. But if your beta starts to move up because of volatility and your cost of capital goes up 1%, that’s a big cost.

EB Altiero Poziemski: Yeah. It seems more likely that the companies that would be interested in taking advantage of this would be the smaller firms, the ones that are really hurt by those audit costs, those review costs. Financial reporting is expensive. I talked to my class about this. Anytime you add a disclosure requirement, that is a real cost. There is a person who has to write up that footnote who has to collect the information. If you are a organization that operates in multiple jurisdictions, you have to get all of the information, aggregate it, make sure it’s in the same format, and interpret it through U.S. GAAP that costs actual dollars.

Paul Jarley: So with the advent of AI, might all of this be irrelevant? Can you imagine a world in the next decade where all earnings are reported instantaneously for everyone to see?

EB Altiero Poziemski: I mean, I can’t say it’s impossible. I can’t currently see it, only because I think that auditing is one of the things that although we’re going to end up using AI in auditing, I think the audit profession itself becomes even more important in the face of AI because AI is a black box. You put information in, you don’t know what it does, it spits information out. So it becomes really critical to look at anything that comes out of AI with an auditor brain. You have to have that auditor level of skepticism. When you look at that data. You have to have the level of expertise to interpret it and know if what the AI gave you is right if it’s following U.S. GAAP. And so I think it’s going to be a little bit still before we can trust AI to take numbers out of a general ledger system, put them into a financial report, follows all of the rules of the SEC and FASB and is reliably doing so.

Paul Gregg: Yeah, it would seem unlikely, but even if AI could generate perfect financial statements every month, I’m not going to disclose them to the public every month. Because that’s way too much effort for have the public that on top of your business, you do need some maneuvering room and some time to manage the company.

Paul Jarley: Jim, would you want daily reports if you could get them?

Jim Balaschak: I’m fine with quarterly. There’s enough massaging of the numbers as it is. So, I don’t think daily would be any improvement.

Paul Jarley: Can I push back? I mean, we publish stock prices every day. Nobody seems to worry about that.

Paul Gregg: If you’re a mutual fund, your results are published every day, right? You know your gain or loss on your existing securities. But that’s a little different I think.

EB Altiero Poziemski: I do think that gives an advantage to the sophisticated investor who has the computing power to go through all of that information and maybe detect patterns, but maybe not, right? There may be just spurious correlations in there that they’re acting on and it doesn’t really mean anything.

Paul Jarley: Well, there are random fluctuations, right? I mean they happen all the time.

EB Altiero Poziemski: Yeah, accounting data is definitely not meaningful on a daily basis.

Jim Balaschak: I could see AI more estimating sales, but I don’t see on the expense side being able to generate, that being too accurate.

Paul Jarley: Because in the small organization, the person who books revenue could be sick one day sending somebody into it tizzy.

EB Altiero Poziemski: We also have accruals that have, we’re guessing throughout the year, and then we have to fix them when it comes to a reporting date. And so on any point in time actually knowing the true number is sometimes not possible.

Paul Jarley: Why do you think the President recommends it then?

EB Altiero Poziemski: I mean, I know what he said. He said it was to lower cost.

Paul Jarley: Right? He said to lower cost.

Paul Gregg: Some company may be pressuring him or suggesting this to him.

EB Altiero Poziemski: Yeah, he may have constituents who have been talking to him about it.

Paul Jarley: Well, small business to your point, right, might be a place where some gain, some cost savings might happen.

EB Altiero Poziemski: And that’s a place that the FASB and the SEC have kind of always had this push and pull. Where the FASB has maintained forever, that there is one U.S. GAAP, and if you report under U.S. GAAP, everyone should know what that means. Whereas smaller businesses have been arguing, we should have different reporting requirements. You should make it easier for us so that we have a chance. These reporting requirements are too onerous, we can’t do them. So it comes to a point where they have to make a decision to either report wrong, badly, or not do the types of transactions that they want to do because they can’t afford to do the reporting.

Jim Balaschak: Well, that does keep a lot of the smaller companies from going public.

Paul Gregg: It’s very expensive to be a public company.

Jim Balaschak: Very expensive.

Paul Jarley: No doubt, right? Yeah. And perhaps that’s part of the motivation here. Alright, I don’t want, well, two of the three of you EB’s pretty young, to just sound like old guys wanting new people to get off their lawn. Is there a different system that would work better or did 1973 get it right, and it should be the quarterly report forever?

Paul Gregg: I’m certainly happy with the quarterly report. It’s the data itself and how we get accurate data within each month’s financial statements is really the key. Reporting it is a separate issue. How often do we report it to our shareholders? And data will become more accurate with AI. No doubt about it. The real key is forecasting, because that’s where the valuations come in and that’s what everybody’s interested in, not just what you did, but where are you going?

Paul Jarley: Particularly against where you said you would be.

Paul Gregg: Yes. So that gets back to you better know how to accurately forecast.

Jim Balaschak: Yes, that’s more important.

Paul Jarley: So is the death of the quarterly report exaggerated a yes or no? Paul?

Paul Gregg: I don’t think it’s going to happen.

Paul Jarley: Jim?

Jim Balaschak: I don’t think it’s going to happen either. I hope it doesn’t happen.

Paul Jarley: EB?

EB Altiero Poziemski: I’m not as confident, but I don’t think it’s going to happen.

Paul Jarley: It’s my podcast, so I get to go last.

This debate isn’t really about the merits of quarterly versus semi-annual reports. It’s about trust. Quarterly disclosure has become part of the governance rhythm of our capital markets. Boards expect it, investors demand it and exchanges quietly enforce it. That kind of inertia is hard to break, especially in an arena where credibility is everything. I don’t think we’ll be writing an obituary for the quarterly earnings report anytime soon. If change does come, it probably won’t be wholesale. Big firms will keep reporting every quarter because stakeholders will demand it. And moving away from such reporting, will bring suspicion. But small companies, the ones for whom the compliance costs are steepest, might see some relief. The paradox, of course, is that the smaller firms are also the most vulnerable to sudden revenue swings, which means investors may want more frequent, not less frequent updates. Reducing report frequency might also increase the cost of capital for these firms, negating any positives from the reduction in reporting costs.

The future may not be a choice between quarterly or semi-annual. It may be a world of lighter tiered reporting where transparency is preserved, direct costs are contained and trust remains the currency of the system. Or maybe nothing happens simply because humans don’t like change.

So what’s your take? Check us out online and share your thoughts at business.ucf.edu/podcast. And be sure to follow us on social media to be alerted when our next episode airs. I’ll be joined by UCF’s own Carolyn Massiah and pet mom Amber Downs to learn if pet influencers are really a thing, and more importantly, if my dog Sneaky Pete has a shot at becoming one of them.

Special thanks to my new producer, Brent Meske, and the whole team at the Office of Outreach and Engagement here at the UCF College of Business. And thank you for listening. Until next time, Charge On.