A proposed shift to semi-annual financial reporting for public companies would make it tougher for investors to detect financial strains, and other emerging risks, cautions Moody’s Ratings.
Last week, the U.S. Securities and Exchange Commission (SEC) launched a consultation on proposed rule changes to allow companies to adopt semi-annual reporting. That move comes amid an ongoing pilot project by the Canadian Securities Administrators (CSA) to enable listed venture issuers to opt for semi-annual reporting.
In both cases, regulators are exploring the option of less frequent reporting as a way to reduce compliance costs for public companies.
Yet, in a research note, Moody’s suggested that a shift to semi-annual reporting would be a negative for investors.
“[I]f adopted, [it] would reduce the cadence of standardized financial updates and weaken transparency, delaying investors’ access to consistent, useful financial information,” it said.
Reducing the frequency of required disclosures from every three months to six months, “limits timely visibility into company performance, liquidity trends, and emerging risks, particularly in periods of macroeconomic uncertainty or sector-specific volatility,” it noted.
These risks are most significant for companies with high leverage that operate in cyclical industries, or in rapidly evolving sectors, such as artificial intelligence and data centre infrastructure, “where issuers are undertaking unprecedented levels of investment amid shifting demand patterns and significant execution risk,” the report said.
In these sorts of sectors, timely reporting is critical to assessing credit quality, it noted.
“Longer reporting intervals may inhibit an investors’ ability to detect indicators that may signal weaknesses in demand, cost overruns, or emerging liquidity pressures,” it said.
Additionally, the SEC’s proposal would give companies greater discretion at setting their reporting cadence annually, Moody’s noted, which could also alter the timing of disclosure from year to year.
“This flexibility may reduce comparability across periods and issuers, increase investor monitoring costs, and potentially enable opportunistic reporting behaviour by allowing companies to align disclosure frequency with favourable operating conditions,” it said.
At the same time, Moody’s said that semi-annual reporting will not reduce the market’s focus on short-term results. Instead, it will make investors more reliant on voluntary disclosure, management guidance and other non-standard reporting.
“While the proposal is intended to reduce regulatory burden and support long-term decision-making, the trade-off is a structurally less consistent and less frequent flow of financial information,” it said.