On May 5, the SEC released a proposed rule that would give public companies the option to file a semiannual interim report instead of three quarterly reports. The primary trade-off arising from reduced frequency of mandatory interim reporting seems to be cost versus transparency. The SEC theorizes that lowering costs incentivizes more private companies to go public and existing ones to remain public. Less frequent financial statement and MD&A disclosures, however, may impact investors’ ability to evaluate companies.

Key issues revolve around how the proposal would affect the public-company reporting ecosystem. For companies electing to continue filing quarterly reports, there would likely be little to no change. For companies electing to file semiannually, practical questions include: Would quarterly earnings reports, coupled with earnings calls, provide adequate financial information to investors? How would auditors’ quarterly reviews be impacted? Would correction of accounting errors through revisions become even less transparent? How would legal exposure change (e.g., reduced 302 certifications versus potential increased Regulation FD exposure).

Because it is only a proposed rule, public companies do not need to make any immediate decisions, change their reporting calendars, or modify their disclosure controls. The SEC will have to evaluate comments it receives and assess how the final rules should operate.

1. Who Would Be Most Likely to Elect Semiannual Reporting?

The proposal would be available broadly to Exchange Act reporting companies that currently file Form 10-Q. In practice, use of the option would likely vary by issuer type, industry, investor base, and capital markets activity. We anticipate that smaller reporting companies, emerging growth companies, pre-revenue companies, and issuers whose value is driven by specific milestones or regulatory considerations are the most likely to consider semiannual reporting. For these companies, the cost and management burden of quarterly reporting may outweigh the usefulness of Q1 and Q3 financial statements.

By contrast, larger issuers, companies with significant analyst coverage, companies with institutional investor bases, and companies that frequently access the capital markets may decide to maintain quarterly reporting. Reasons are multifold and include that they already have processes in place, compliance costs are not as important a factor, and/or pressure from investors to continue quarterly reporting. For these companies, quarterly information may be embedded in market expectations (e.g., investor models, debt covenants, board processes, investor relations calendars, and underwriting diligence). Consequently, electing semiannual reporting may be legally optional, but practically constrained.

2. What Information Would Investors Receive Less Frequently?

Because companies electing semiannual reporting would not file a Q1 or Q3 Form 10-Q, they would receive fewer reviewed financial statements, MD&A disclosures, disclosure controls and procedures certifications, internal and risk-factor updates, and  XBRL-tagged data. While it is likely that most companies disseminating quarterly earnings releases would continue to do so (even though not currently required) less frequent Form 10-Q reporting would impact the comparability of available information and possibly its reliability, and usability.

3. Would Quarterly Earnings Releases Become More Important?

For companies electing semiannual reporting, we believe the answer is yes, because it would become the primary source for quarterly information. While some companies electing semiannual reporting might not continue issuing quarterly guidance or disseminate quarterly earnings releases, we believe investor expectations will make this scenario less likely. Yet there are caveats: Quarterly earnings releases are less standardized than Form 10-Q, are furnished rather than filed (which may impact legal exposure), and may not be XBRL-tagged or reviewed by auditors. From a federal securities law standpoint, legal exposure may decrease for CEOs and CFOs that would have fewer 302 Certifications. Companies would still need to comply with anti-fraud provisions and Regulation G relating to non-GAAP measures.

Illustration:

A smaller technology company elects semiannual reporting but continues issuing Q1 and Q3 earnings releases because analysts and investors expect quarterly updates. The company no longer files Form 10-Q for those periods but still provides selected financial metrics and non-GAAP measures. Investors receive quarterly information, but not through the full Form 10-Q framework. The company may reduce its filing burden, but investors and counsel must evaluate whether the voluntary disclosure is sufficiently consistent, reliable, and comparable.

4. How Could the Proposal Affect Internal Controls and Audit Processes?

Current quarterly reporting on Form 10-Q is not only a disclosure event, it also part of a recurring control process. Preparing a Form 10-Q requires companies to close the books, update MD&A, evaluate disclosure controls, consider changes in internal control over financial reporting, interact with auditors, and obtain management certifications.

Reducing the number of mandatory interim reporting periods may reduce process burden. However, it could also delay the identification of accounting issues, control deficiencies, or disclosure problems. That risk may be more significant for companies with complex revenue recognition, significant estimates, valuation-sensitive assets, acquisitions, restructuring activity, liquidity pressure, or prior control deficiencies.

Some companies may preserve portions of the quarterly control process even if Form 10-Q becomes optional. They may continue quarterly disclosure committee meetings, internal certifications, auditor procedures, or board-level financial reviews because those processes serve governance, audit, financing, and investor-relations functions beyond SEC compliance.

5. Would Semiannual Reporting Actually Reduce Costs?

A major premise for the proposal is that it would cut compliance costs and could also reduce management distraction from recurring quarterly reporting cycles. However, it is unclear what the actual cost savings will be, and whether it would be as much as the SEC anticipates. Companies issuing quarterly earnings releases would still need to close their books quarterly. Companies would also likely need to continue preparing quarterly board materials, hold investor calls, maintain quarterly forecasts, and interact with auditors. Moreover, companies accessing capital markets may also need quarterly-quality information for securities offerings, underwriter diligence, comfort letters, lender reporting, or investor presentations.

For some companies, there could be significant savings from not preparing and filing a full Form 10-Q. However, meaningful cost savings may not materialize for companies keeping their quarterly processes largely intact. For them, semiannual reporting could reduce the SEC filing obligation without eliminating the quarterly operating rhythm and associated cost.

6. What can the U.S. learn from countries that have moved away from mandatory quarterly reporting?

The SEC’s semiannual reporting proposal references a 2017 CFA Institute Research Foundation study on the UK market, where mandatory quarterly reporting was eliminated in 2014. The study found that quarterly reporting was associated with more analyst coverage and improved analyst earnings forecast accuracy. But when the UK removed the quarterly reporting mandate, most companies continued to report quarterly voluntarily. By the end of 2015, fewer than 10% of companies had switched to semiannual reporting.

The UK experience suggests that even if quarterly reporting becomes optional, market expectations may continue to influence whether companies provide quarterly information, particularly for larger companies with significant analyst and investor attention.

Bottom Line

The SEC’s proposal is not expected to end quarterly reporting altogether. It would simply make the reporting frequency mandated by the federal securities laws a company-level election.

Even if adopted, many companies may continue to file quarterly. A minority of companies may choose to file semiannually and not provide much quarterly information. Many companies may adopt a hybrid model electing semiannual reporting but continuing to disseminate quarterly communication through earnings releases, calls, guidance, and investor presentations.

If adopted, only time will tell whether companies will experience meaningful cost savings and/or whether the number of public companies stabilizes or increases.

For now, the proposal is only a comment letter exercise and perhaps an opportunity to assess  scenarios. The practical question is not simply whether companies should report every three months or every six months. It is whether investors will still get timely, reliable, and comparable information if quarterly reporting becomes optional rather than mandatory.

If you have any questions or would like to discuss how we can help, reach out to Daniel Brinks or Howard Scheck.

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Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of StoneTurn Group, LLP, Province, LLC, or their affiliates. This article is provided for informational purposes only and does not constitute legal, financial, or other professional advice.