The SEC tried semiannual reporting before; here's why it went back

The Securities and Exchange Commission has proposed allowing public companies to replace three quarterly reports on Form 10-Q with one semiannual report on a new Form 10-S.

It has asked this question before.

In 1946, the SEC required certain public companies to begin reporting sales or operating revenues every quarter. Critics argued that quarterly figures could mislead investors in seasonal businesses. Sales might rise without profits rising with them. Unusual events could distort a single quarter, and requiring companies to compile financial information every three months would impose an unreasonable burden.

Those arguments sound remarkably familiar today.

Commissioner Mark Uyeda has asked whether there is "any particular magic to quarterly reporting."

There is not. But history suggests that is the wrong question.

The SEC did not settle on three months because a quarter possessed some special economic significance. Quarterly reporting developed through decades of experimentation over how frequently corporations should be required to stop, measure themselves and give investors a standardized account of what happened.

Al Drago/Bloomberg

The history began almost with the SEC itself. In its first annual report in 1935, the commission explained that periodic reports were needed to keep corporate information "reasonably current." Two years later, it was already studying whether to obtain financial information more frequently than once a year.

An annual report might accurately describe a company, but much could happen before investors saw the next one. Form 8-K helped by requiring disclosure of specified important events, but event-driven reporting did not require companies to report financial performance at regular intervals.

The initial quarterly requirement was modest. Companies generally had to disclose sales or operating revenues. The SEC wanted condensed quarterly income statements, but many companies did not yet have accounting systems that could produce sufficiently reliable income figures every three months.

The result was a narrower requirement. The commission asked for what companies could reasonably produce.

It also took seriously the argument that quarterly figures might mislead. For seasonal businesses, it suggested comparison with the corresponding quarter of the prior year. If sales alone did not reflect profitability, companies could provide additional explanation.

Context, rather than silence, was the answer.

The SEC did not regard quarterly reporting as untouchable. In 1953, it discontinued the requirement. Two years later, it adopted semiannual reporting through Form 9-K.

For the next 15 years, the SEC's interim reporting regime was semiannual.

Then the commission changed course.

In 1970, following a major review of federal disclosure policy led by Commissioner Francis Wheat, the SEC eliminated Form 9-K and introduced the quarterly Form 10-Q.

The reasoning matters. The Wheat Report concluded that a regular quarterly report would be more useful than the existing system of irregular current reports. The SEC explained that Form 10-Q would back up companies' more immediate disclosures while establishing uniform reporting standards.

The new system combined two things: greater frequency and uniformity.

Quarterly reporting does more than make information arrive sooner. It puts public companies on a common reporting clock.

Every three months, quarterly filers prepare financial statements under common accounting rules and update required disclosures. Their fiscal calendars may differ, but the reporting cadence is common.

That matters because capital markets depend on comparison. Investors evaluate revenues, margins, inventories and cash flows over time and against competitors. A standardized reporting cycle creates recurring points for those comparisons.

An optional system would loosen that structure. One company might remain a quarterly filer. Another might elect semiannual reporting. A third might make the same election while continuing to issue voluntary quarterly earnings releases.

Each might have a perfectly reasonable explanation. Collectively, however, the market would become less standardized. Investors would have to evaluate not only what companies report, but differences in when they report it and what they disclose in between.

Other disclosure mechanisms do not fully solve that problem. Form 8-K requires disclosure when certain specified events occur. A periodic report requires management to stop at a predetermined interval and account systematically for what has happened, including developments that may not trigger a current report.

An earnings release is different again. Companies have greater discretion over its presentation and emphasis. The 10-Q supplies a standardized regulatory account that voluntary communications do not.

There is also an irony in using semiannual reporting to address short-termism. The proposal would not change the frequency of earnings releases or earnings calls, leaving those decisions to companies. Wall Street's focus on quarterly performance could therefore survive while mandatory first- and third-quarter reports disappear.

None of this means that today's Form 10-Q is beyond reform. Decades of additional requirements have accumulated around it, and some may impose costs greater than their benefits.

The SEC should examine them. Repeated disclosures that add little new information could be pared back. Requirements could be scaled where particular disclosures impose disproportionate burdens. The commission could distinguish more carefully between information investors need every quarter and information that can wait until year-end.

There is historical precedent for exactly this approach.

In 1946, when companies' accounting systems could not produce the condensed income statements the SEC wanted reliably every quarter, the commission did not abandon the reporting interval. It narrowed what companies had to provide.

Eighty years later, companies have built accounting systems, disclosure controls and reporting routines around quarterly reporting.

If those reports have become too burdensome, make them better.

The SEC has already experimented with semiannual reporting. What ultimately emerged was a system designed to make corporate information current, regular and comparable.

There is no magic in three months.

There is value in requiring public companies, at regular intervals, to stop and account for themselves on a common clock.