27 April 2009

Timeliness of annual reports


In general, Malaysian listed companies take about four to five months to publish their annual reports. However, a few listed companies have put in extra effort to publish their annual reports within the first three months after their financial year-end.

Public Bank Bhd took 89 days, barely three months, to produce its 2003 annual report. Whilst this is already a good achievement, it has since then reduced the turnaround time to a mere 34 days to produce its 2008 annual report. Bursa Malaysia Bhd, which commenced listing in March 2005, has significantly reduced its turnaround time, from 123 days for its maiden 2004 annual report to 70 days for its 2008 annual report.

Boustead Holdings Bhd, NCB Holdings Bhd and Malayan Banking Bhd have consistently released their annual reports within the third month of their financial year-end. Interestingly, these government-linked companies (GLCs) are among the leaders in pursuing best market practises in annual reports.

Some of the related companies in the same group are as equally efficient, notably LPI Capital Bhd, a related company of Public Bank Group, and Boustead Heavy Industries Corporation Bhd and UAC Bhd, which are subsidiaries of Boustead Holdings Bhd. This is a reflection of the quality of their group’s management and how its efficiency in reporting permeates the group.

These companies are role models for other listed companies in terms of annual reporting. They have demonstrated that it is possible to release a complete record of the company’s full-year activities and performance within a short time frame, although the window of time given to do so is much longer (see chart).

Under Bursa Malaysia’s securities listing requirements, a listed companies must issue its audited accounts and lodge it with the exchange within four months (unless it has released its annual report) and its annual report no later than six months after its financial year-end. This provides a window of four months to get the accounts audited and another two months to complete the annual report.

As it is, listed companies are required to announce their financial results within two months of the quarter’s end. For the fourth-quarter results announcement, listed companies have to ensure the announced profit after tax and minority interest does not deviate by 10% or more from the accounts that are eventually audited. Otherwise, an explanation is required. Therefore, most companies would get their auditors to work early to ensure that the fourth-quarter results announcement is as close as possible to the final audited accounts.

That being the case, if companies brought forward the audit process, or even commenced the audit before the close of the financial year, it is possible to complete the audited accounts within the two month deadline of financial results announcement. This would pave the way for them to be able to release the annual reports within the third month of their financial year-end or even sooner.

With a proper execution plan put in place well ahead of the financial year-end, and with the will of management, companies can set an internal deadline to publish their annual report early. It is not just the content of the annual report that is important, but also the speed with which the report is made available.

Take Berkshire Hathaway’s annual report – it has no pictures or graphics but it comes out consistently in February, two months after its financial year-end.

The longer it takes for the annual report to be released, the less relevant it becomes, as much of the information it contains will become outdated. Business performance may change drastically in today’s rapidly changing economic landscape. Shareholders, analysts and investors may already be anticipating the company’s first-quarter financial results before the annual report comes out and the company may have foregone the opportunity to allow investors to study the company’s business in depth through the annual report. Although long-term investors welcome the annual report to help them understand the company better, short-term investors are more concerned with timely information to help them make spot investment decisions.

Efficient market hypothesis advocates that timeliness of material information is crucial to determining the true value of a listed company’s share price. This implies that all publicly available information, including management’s discourse on the company’s prospects, will be factored in towards determining the company’s share price. Therefore, the longer the annual report takes to be issued, the less complete the information would be for share valuation and price discovery. Any information gap would only benefit insiders who have access to exclusive information that is not yet publicly available.

Securities laws and regulations in developed countries require the annual report, or an equivalent comprehensive full-year disclosure document, to be filed with the regulators within a shorter time frame than in Malaysia. For instance, the deadline is three months in Japan, four months in the UK, and 60 days for companies with large market capitalisation and 75 or 90 days for smaller companies in the US.

A shorter annual reporting deadline requires greater management discipline by listed companies, but does not add much to the company’s cost of compliance. It makes for a more efficient capital market as information is disseminated sooner and is therefore more relevant.

The investment community desires information that is not only comprehensive, but also timely.

This article was published in The Edge Malaysia on 27 April 2009.

No comments:

Post a Comment