IN RECENT YEARS, the annual financial statements of public corporations have been subject to continuous examination, controversy, soul searching and often to efforts at improvement. The auditors who are charged with attesting to the information in annual reports are themselves being examined vigorously from many quarters. Financial accounting principles are being questioned and revised. The results of these efforts have not been insignificant. There is little doubt that the quality and reliability of corporate annual reporting has improved in recent years, though certainly not to the point where there is nothing left to criticize. At the same time that this great effort has been devoted to the examination of annual financial reports another financial statement, the interim report, has attained increasing significance. Quarterly reports are being used increasingly by research analysts to update and adjust their projections of the future financial performance of corporations. The advent of computers and computer information services has made it feasible to constantly update statistical formulas or models which are used to simultaneously evaluate and compare the investment prospects of a very large number of individual securities. Since earnings per share figures are reported quarterly, the formulas can be updated four times a year, based on the latest twelve months earnings figure. During the past several years, an increasing number of individual and institutional investors have striven to maximize investment results in a short period of time. To this class of investors, the latest twelve months reported earnings and quarterly earnings comparisons to be reported in the near future often assume more significance than earnings reported in an annual report. Perhaps the significance of interim reports is best shown by noting the impact that these reports can have on the market value of securities on a short term basis. Table 1 contains some recent examples. Quarterly reports are released and decisions are made based upon them. More recently a tendency has developed to act on estimates of quarterly earnings, with substantial market price corrections frequently occurring when reported quarterly earnings vary from those anticipated. Thus, we have the apparently illogical case of a drop in a stock price on a substantial reported rise in quarterly earnings, because that rise was not as high as had been predicted. For example, Syntex common stock dropped 5.7% the day the company reported a second quarter fiscal 1966 earnings increase of 100%. Increasingly common too, is the tendency to utilize changes in profit margins shown in quarterly reports as indicators of future changes in reported earnings. Perhaps the authors appear to belabor the obvious. It is no secret that analysts and the market as a whole are according increasing attention to quarterly reports. The authors do not question that fact, nor are we suggesting that analysts should ignore the only significant public source of interim financial information. Rather, this paper questions the quality of the information contained in quarterly reports upon which, it appears, analysts are placing an increasing amount of reliance. Some of the limitations of quarterly or other interim reports are clearly perceived by most analysts and are not of concern here. Few would be so unsophisticated as to multiply one quarter's earnings by four to estimate LEE J. SEIDLER, PH.D., CPA, is an Assistant Professor of Accounting at the Graduate School of Business Administration, New York University. He has extensive experience as a practicing CPA and was a senior accountant with Price Waterhouse & Co.
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Jul 15, 2023
Neil Fargher + 1
Open Access