EPM and Reporting Periods

Posted by Steve Berry

Jan 18, 2019 10:53:14 AM

Think Reporting Quarterly Is Shortsighted? Get EPM.

The SEC is considering letting companies switch to semi-annual reporting so they can then create more long-term value for shareholders. EPM makes that a false premise.

The debate over which is better — quarterly or semi-annual reporting — never seems to end. Last month in fact the administration asked the SEC to answer that very question. The argument against quarterly reporting is familiar, and a January 2017 article in Institutional Investor summarized it this way:

“Critics of so-called quarterly capitalism say it leads to companies failing to plan for the long-term — giving short shrift to research and development, the building of new plants and factories and developing employees. These critics say a move to semi-annual reporting would lessen profit pressure from shareholders.”

Another alleged drawback of quarterly reports, often cited by those who must actually prepare them — i.e., financial professionals — is the sheer number of tasks required. Here is a sample list:

  • “Develop account reconciliations, journal entries, data compilation and analyses ensuring accuracy and timely delivery.
  • “Develop regular financial statements, prepare special projects and perform analysis for senior management.
  • “Design periodical, weekly, and quarterly sales reports and administer general ledger reconciliations.
  • “Analyze various operating outputs, manage project status schedules and evaluate it regularly.
  • “Maintain accuracy in all asset files, balance sheets and provide support to all work papers and bank account.
  • “Coordinate with various departments and perform variation analyses for all technical accounting problems to frame accounting policies, and develop annual capital expenditure budget.”

And so on….

Given a list like this, it’s easy to argue that reporting two times a year instead of four might create a lot less stress, reduce accounting costs, and give financial professionals more time to focus on strategic issues as opposed to tactical tasks. Then again, why not use technology to make these tasks more strategic or at least more automated? For example, what if collecting operational data was not just about data collection but also about real time visualizations of how operational improvements were impacting financial outcomes on a day-to-day basis?

Reporting Frequency Should Not Impact Strategy

On the pro-quarterly reporting side of the debate there is strong empirical evidence that financial reporting frequency has no material impact on the levels of strategic investment — including outlays for property, plant, and equipment or for research and development. Those were the findings of a research project led by Robert Pozen, a senior fellow at the Brookings Institution, former president of Fidelity Management and Research, and senior lecturer at Harvard Business School. The research looked at UK companies before, during, and after a 2007-2014 European Commission mandate that companies report quarterly. The study also found that switching to quarterly reporting was associated with increased analyst coverage, more accurate analyst earnings forecasts, and increased management guidance about future earnings and sales.

The key question then, and one which the Pozen study does not answer, is this:  How is it possible for companies to act strategically (or even more strategically) given both quarterly time horizons and all the tactical work those time horizons seem to require?

The answer is that the tradeoff between quarterly reporting and the ability to act in your long-term interests is a false premise. Companies can do both. In fact they must do both. In today’s economy, companies have to do strategy much faster than they used to anyway, regardless of how often they report financial results. No longer do companies have the luxury to ponder their next big move over a six or even a three-month period. They have to do it every day, in real time, in response to dynamic events.

It’s why companies adopt EPM — and not just so they can do financial reporting quarterly — although the benefits of optimized financial reporting are not to be dismissed. If your finance team relies on spreadsheets instead of EPM to do all the reporting tasks listed above, then the “quarterly reporting is bad” narrative is probably true — your teams really will not have time to add much strategic value. They will be too busy trying to chase down numbers, reconciling different versions of the truth, and troubleshooting broken Excel formulas.

But a better reason to adopt EPM is to bring true strategic value to even routine reporting tasks. With EPM you are not just collecting data, you are connecting the dots between financial outcomes and what is happening operationally. Your leaders can collaborate effectively across the enterprise as a team regardless of geographic or organizational boundaries because everyone sees the same truth and has real time access and visualization tools. EPM does not just show you the data; it helps you see which data and which decisions are most important — so performance actually is driven by strategy rather than by reporting deadlines — no matter how often you report.

Topics: Technology Insights, Cloud EPM, Enterprise Performance Management (EPM), Oracle Products