Quarterly reporting: the road ahead

Singapore

MANDATORY quarterly reporting may soon have its head on a plate, going by recent rumblings from the regulatory domain here.

Tan Cheng Han, head of Singapore Exchange Regulation Pte Ltd (SGX RegCo), the Exchange's newly formed regulatory subsidiary, said a fortnight ago that the practice of mandatory quarterly reporting would be up for review, with an update expected by the middle of next year.

Prof Tan said the Securities And Futures Act has broadened its definition of materiality, while the Exchange has been more aggressive in addressing disclosure lapses - which could provide some safeguards if quarterly reporting is no longer compulsory.

This follows on from the SGX announcement in January that it planned to study if the local market still needs quarterly reporting.

If Singapore does decide to drop mandatory quarterly reporting, which it introduced in 2003, it is likely to be the first jurisdiction in the region to do so.

According to Asian Companies' Financial Reporting Frequency, a report authored by Francis Adrian Viernes and posted on the CFA Institute's Asia-Pacific Research Exchange (ARX) member portal in March last year, most companies in the Asia-Pacific release quarterly reports, with a complete set of financial statements.

The report reflected that, while jurisdictions in Europe may have been resisting the adoption of quarterly reporting, the practice is widely practised and accepted in this part of the world.

Still, while it is hardly justified to do something just because your neighbour does it, the data does suggest how much Singapore would be out of sync with the rest of the region's capital markets should it decide to abandon quarterly reporting.

For one thing, the city-state is likely to earn the disdain of organisations such as the Asian Corporate Governance Association (ACGA), which ranks jurisdictions in the region according to their corporate governance practices. The ACGA, an independent, non-profit body, warned in its recent CG Watch 2016 that Singapore would be downgraded should it remove its quarterly reporting requirement.

But there are those who will argue that doing away with quarterly reporting will help make Singapore a more attractive listing destination.

The push from the corporates to drop quarterly reporting has increased in recent years. Companies have made no secret of the notion that the practice increases their compliance and reporting costs. And the regime has been growing more sympathetic to such views in its desire to lure listings here - believing fewer rules would make for a more attractive destination.

There have been real-life examples that seemingly support this belief. The most notable is massage chair and lifestyle products company, Osim. It delisted from SGX last year, following a S$1 billion buyout led by its founder Ron Sim, and it is attempting to re-list in Hong Kong as the V3 Group.

Mr Sim has made known his dissatisfaction with the regulatory requirements of listing in Singapore, saying - among other things - that "quarterly reporting destroys company value".

Of course, the valuations Mr Sim's company achieved here versus the perceived valuations he believes it will attract in Hong Kong also played a big part in his decision to re-list in Hong Kong.

Capital markets lawyers whom we have spoken to in the last two months have also said that valuations have more to do with companies choosing to list elsewhere than the compliance cost associated with listing here - though they pointed out that the latter cannot be discounted.

Any improvement (brought about by eliminating the need for quarterly reporting) to the number of listings here would also have to be balanced against the cost to investors, and the regime needs to be mindful of the reasons it introduced quarterly reporting in the first place.

A recent study, Financial Reporting Frequency And Earnings Information Spillovers Around The World, states: "The evidence suggests that reduced reporting frequency impairs the ability of investors to properly value firms and impedes the efficiency of financial markets."

The joint study, conducted by Salman Arif of the Kelley School of Business at Indiana University and Emmanuel T De George of London Business School , examined whether companies' reduced reporting frequency affects how investors use alternative sources of information.

"We show that not only does low reporting frequency affect asset prices by exacerbating information spillovers, but it can also have unintended consequences in the form of impairing the ability of investors to properly value firms and impeding the efficiency of financial markets. Regulators and policymakers around the world should take into account these consequences when considering changing the frequency of mandatory financial reports."

It is an argument that Ang Hao Yao, an active retail investor in the Singapore stock market for the last 25 years, agrees with.

"If companies reduce the regularity of reporting, information asymmetry between the majority and minority shareholders will be accentuated.

"While it may appear more attractive to companies to list here if reporting requirements were to be lessened, I think we should also consider the reduced attractiveness for investors to put their money here when information is reported less frequently."

He suggests a possible adjustment to the rule, while keeping it in place: "If there were to be changes to the quarterly reporting regime, I would prefer a change in the threshold for quarterly reporting from S$75 million to, say, S$100 million. Perhaps to ease the burden of reporting, a simplified format can be introduced. But I think quarterly reporting should remain as a mainstay of our market."

One could also argue that in order to prevent the perceived impacts to market efficiency and information asymmetry, Singapore should increase its surveillance and enforcement of continuous disclosure by companies should it choose to do away with quarterly reporting.

Mak Yuen Teen, corporate governance advocate and professor of accounting, said: "Quarterly reporting was introduced as part of our move to a disclosure-based regime and caveat emptor for investors.

"By reducing the information available to investors, there will be a reasonable expectation on the part of investors of enhanced monitoring and enforcement of the continuous disclosure requirement and insider trading provisions by SGX's Regco and other regulators. There may also be a need to review whether the current blackout periods for trading are adequate and whether stricter controls on trading by insiders should be imposed. From an investment standpoint, dropping quarterly reporting may reduce trading and aggravate the lack of liquidity in our market."

Prof Mak has also designed a four-question survey for investors, to determine how pertinent they deem quarterly reporting to be to their investment decisions. The survey is available at tinyurl.com/quarterlyreporting until May 26, after which the results will be published on Prof Mak's website (governanceforstakeholders.com).