First Quarter 2020 Reporting

Will US companies report? Can US companies report? Does quarterly reporting present a unique challenge for US public companies?

For US companies — affected later by the COVID-19 virus, but having an earlier reporting obligation than other global companies — quarterly reporting presents a unique challenge. The COVID-19 virus is expected to worsen and possibly peak in the United States in mid-May, just as these results are to be announced in earnings releases and are due to the SEC.  We believe the US Securities and Exchange Commission (SEC) should encourage companies to publish the most relevant and reliable, even it not perfectly reliable, information they have available for the first quarter of 2020. This information could come from current reports on Form 8-K, in the most reasonable time-period possible. We believe delaying or deferring transmission of information to the market likely will be more detrimental than providing even limited reliable information. Updates from companies preserve an orderly market by replacing worst-case assumptions with more nuanced, even if not perfectly reliable, information.

Will US companies report?

On 4 March 2020, the SEC issued a press release announcing an order that allowed companies to delay the SEC filings they would have due between 1 March and 30 April 2020 — if they faced circumstances relative to coronavirus disease 2019 (COVID-19). The SEC noted that they may take further action, if the circumstances warrant, as follows:

To address potential compliance issues, the Commission has issued an order that, subject to certain conditions, provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Among other conditions, companies must convey through a current report a summary of why the relief is needed in their particular circumstances. The Commission may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. Companies and their representatives are encouraged to contact SEC staff with questions or matters of particular concern.

For most of the largest US companies — many of which have calendar year-ends — their annual reports were due at the end of February. These companies do not have another mandatory filing deadline until 15 May 2020, the due date for the 31 March 2020 quarter-end. Although the “15 Days to Slow the Spread” will come to an end just as the first quarter closes, daily updates out of the White House in Washington and the New York State House in Albany suggest that quarterly reports likely will be due as the pandemic worsens through April and May.

This raises interesting questions about whether and when the SEC will take further action — particularly given that the quarter closes in one week’s time for the vast majority of US public companies. As of this writing, the SEC has not issued an updated press release [1] informing investors whether further allowances will be made for public companies as they approach the end of the first quarter.

Can US companies report?

For companies and investors alike, the delivery and receipt of quarterly reports amid the COVID-19 pandemic is tricky. Just when investors need the information most, companies may not be able to prepare it — or the high degree of uncertainty may make the quality of the information less than decision-useful. Furthermore, government bailout programs need to be digested and incorporated into financial results. In addition, logistics surrounding state shelter-in-place and lockdown laws may affect companies in New York, New Jersey, Connecticut, and California differently than in other parts of the United States. Industries and companies will face different impacts and companies will need to consider, for example, the following:

• Will they be able to complete their quarterly reporting process with teams working remotely?
• Will they be able to make reasonable and reliable estimates that are necessary for the production of relevant financial information?
• Will developments in the period between quarter close and reporting dates, given the uncertainty, be too challenging to properly incorporate?
• Will auditors be able to perform the required quarterly reviews?
• Will managements and boards be able to certify the results?

Presently, the SEC guidance of 4 March suggests that companies need to provide a current report, presumably a Form 8-K, to explain their delay. The question for investors is innumerable: What details regarding the delay in reporting will be provided? Will companies in particular industries report in lockstep? How will the market assimilate the information or lack of information? It is hard to know.

Fundamental analysis will be both necessary and impossible right now. Every company is going to be affected differently. Those providing essential services (i.e., grocery, health care, telecommunications) may benefit, or be less detrimentally affected, by the COVID-19 slowdown. Industries such as airlines and hotels, in contrast, will be decimated by the impacts of the virus — making company fundamental analysis more important. Simultaneously, such analysis will be more difficult given the uncertainty of how long this pandemic and its economic events will persist and how severe they will be. Adding to this is the impact of oil price wars and the drop of interest rates simultaneous with credit challenges faced by energy companies and financial institutions, respectively. Furthermore, the analysis will be complicated by the unprecedented government actions to rightly support the health care of Americans and the US workforce. This is and will continue to be, challenging for even the best-managed companies and even the savviest of investors to assess.

Does quarterly reporting present a unique challenge for US public companies?

Hong Kong, SAR —The Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong Limited (the HK Exchange) have been addressing year-end reporting issues since late January. On 4 February 2020, they issued a joint statement as well as answers to frequently asked questions on 28 February 2020 giving guidance for companies unable to report on annual reports. On 16 March 2020, the SFC and HK Exchange issued an update of its guidance related to year-end 31 December 2019 financial statements. As Hong Kong has quarterly reporting for only a limited number of companies, issues pertaining to quarterly reporting will be less significant.

Europe —In Europe, the EU Transparency Directive eliminated quarterly reporting for EU companies. The European Securities Market Association (ESMA) has issued a limited commentary on 11 March 2020 addressing corporate reporting amid the COVID-19 crisis.

United Kingdom —In the United Kingdom, quarterly reporting is voluntary, as we have noted in our study of the change to (2007) and from (2014) quarterly reporting. Over the weekend, the UK Financial Conduct Authority (FCA) issued a letter to companies regarding their publications of preliminary results before the publication of annual accounts. The FCA warned companies that they should reconsider issuing such preliminary results until they are audited as follows:

The FCA strongly requests all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks.

Investors in capital markets rely on trustworthy information on the companies whose instruments they trade. The unprecedented events of the last couple of weeks mean that the basis on which companies are reporting and planning is changing rapidly. It is important that due consideration is given by companies to these events in preparing their disclosures. Observing timetables set before this crisis arose may not give companies the necessary time to do this.

In addition, listed companies and the audit profession are facing unprecedented practical challenges during the Coronavirus crisis. The FCA believes the practice of issuing preliminary financial statements in advance of the full audited financial statements is adding unnecessarily to the pressure on companies and the audit profession at this moment.

The FCA notes that the practice of issuing preliminary financial statements is common among UK-listed companies but is not required by either the Listing Rules or the Transparency Directive. Rather, the requirement is that companies publish full audited financial statements within four months of the financial year-end. The FCA further notes that it is common to publish preliminary financial statements considerably earlier than the four months permitted for the filing of full financial statements.

The UK Financial Reporting Council (FRC) just issued, on 23 March 2020, a release supporting this corporate reporting moratorium.  This guidance appears to be targeted toward year-end annual results rather than first-quarter voluntary disclosures. The implications on voluntary reporting of quarterly results in the United Kingdom have not yet been addressed. What regulators in the UK and globally must weigh, however, is the need for perfectly reliable information against the markets need for some information.

United States —As noted, the open issue for corporate reporting in the United States is related to the quarter ending 31 March 2020. With no interim reporting obligation until 30 June 2020, European and Hong Kong public companies won’t have to produce results until July or August — when the impacts of the pandemic likely will be more clear. The FCA’s announcement on 23 March may illustrate a proclivity to encourage UK companies not to undertake their traditional, but voluntary, quarterly reporting. 

For US companies — affected later by the COVID-19 virus, but having an earlier reporting obligation than other global companies — this presents a unique challenge. The COVID-19 virus is expected to worsen and possibly peak in the United States in mid-May, just as these results are to be announced in earnings releases and are due to the SEC.

The SEC and companies must balance the reliability of the reporting with the market’s desire for relevant and reliable information. Complicating the issue, regulators, such as the FDIC and politicians in Congress, have called for the deferral or suspension of the FASB’s new impairment model (i.e., the current expected credit loss). We don’t believe there is one right answer for the market given that companies are affected differently by the economic effects of the virus and the location and logistics of their business and reporting operations.

What we do know from the 2008 financial crisis is that if investors are not provided with some information, they will make estimates of the impacts that likely will be far worse than actual results. For example, during our outreach on impairment models following the 2008 financial crisis, investors told us they used the price on mortgage-backed securities in the market as the haircut they applied on loans. This resulted in aggressive assumptions with respect to impairment, but it was the only information investors had.

Absent information coming directly from registrants, investors will make assumptions. This situation can be improved by company communication and transparency. To that end, we believe the SEC should encourage companies to publish the most relevant and reliable, even if not perfectly reliable, information they have available. This information could come from current reports on Form 8-K and should be provided in the most reasonable time-period possible. Delaying or deferring transmission of information to the market likely will be more detrimental than providing even limited but reliable information. We do not believe the US market is disadvantaged by the communication of information. In fact, communication is exactly what investors and the market need to operate effectively.

For this reason, we urge the SEC to require more than just a statement as to why a given company cannot report on a timely basis (which is likely to be uninformative boilerplate text). To the extent possible, a company should be required to answer the following questions:

1. How has the crisis affected operations and what further impact is likely over the next three months? Information by broad geography would be helpful.
2. Does the company have sufficient financial resources to continue to service debt and other financial obligations?
3. What policies have the company adopted to provide compensation and benefits to employees who are unable to work because of illness or changes in company operations?
4. Why is the company not able to report on a timely basis? Specifically, companies should articulate why the financial reporting function cannot support the deadlines.

Some companies already have issued updates that answer these questions in whole or part. We believe that such updates preserve an orderly market by replacing worst-case assumptions with nuanced information. In some cases, share prices of the affected companies have risen following the update, as investors are reassured.

[1] On 22 March 2020, the SEC issued a press release regarding relief for registered transfer agents and certain other persons under Section 17A and 17(f) affected by the coronavirus disease 2019 (COVID-19). This does not appear to be applicable to reporting by publicly traded companies.

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