Ready for your quarterly snapshot?

In a bid to retain its position as a leading financial centre, the Hong Kong Exchanges and Clearing has announced plans to introduce quarterly reporting. Chris Davis weighs up the pros and cons

The Hong Kong Exchanges and Clearing (HKEC) has announced plans to introduce quarterly reporting, which will be introduced in stages and is expected to be fully in place by 2011.

The HKEC claims that if Hong Kong is to retain its position as one of the key listing destinations in the world, it needs to comply with standards used in other mature financial markets such as London and New York. The quarterly reporting requirement would also fall in line with mainland China, where the China Securities Regulatory Commission has required quarterly reporting by all listed companies since the first quarter of 2003.

The move to quarterly reporting has generated criticism from some of Hong Kong's high profile companies including HSBC, CLP Holdings, AirChina and Cheung Kong (Holdings), the flagship of Li Kai Shing, Hong Hong's wealthiest businessman. The business heavyweights complain that quarterly reporting would not only be costly, but potentially encourage investors to focus on short-term profits and point out that the additional information could run the risk of causing uncertainty and hence volatility.

The HKEC believes quarterly reporting will boost transparency and give shareholders more timely information on a company's financial performance. Hong Kong is one of the world's few major markets yet to demand companies release information each quarter.

In a bid to dampen criticism, a source close to the proposal said the HKEC is expected to introduce a less burdensome version of the British model (where a three-month reporting requirement was introduced last year) that would require the release of performance highlights rather than a full set of earnings figures. This would require all main board-listed companies to provide management highlights, updating their business development and major sales trends.

More detail required

The quarterly reporting proposal has received support across various areas of Hong Kong's financial community including the city's fund managers, institutional investors, and analysts who have been stepping up demands for better transparency and more frequent financial statements. While the majority of financial professionals support the introduction of quarterly reporting, they have highlighted a need for more detail on the new reporting format and content as well as assistance, especially in the area of training and education.

William Lim, audit partner at Deloitte Touche Tohmatsu in Hong Kong said that, under the current circumstances, there would not be major problems with subprime-related issues as Hong Kong banks and financial institutions generally have not been affected to the same extent as in US and other countries.

He added that quarterly reports would not require auditing or reviewing, however, a large number of banks and listed companies would most likely enlist the services of their auditors and accountants before releasing any information. 'As much of audit client work is seasonal, helping review quarterly reports is an additional role which the Hong Kong accountancy profession should be able to cope with' said Lim.

Depending on how quarterly reporting might be introduced, Lim said investor education could be one way of helping to reduce concerns from listed companies that investors might be inclined to look at short-term performance instead of the bigger picture.

Babak Nikzad, partner in charge of KPMG's Financial Services practice in Hong Kong, agrees that investor education could be one way for the HKEC to allay business fears that quarterly reporting may be misinterpreted. 'How this could be done would require careful consideration and a great deal of cooperation among all parties with a vested interest,' said Nikad, adding that it seems reasonable that investors would like to see mandatory quarterly reporting introduced in order to improve the quality of financial information available to them.

Keith Pogson, Global Financial Services Leader, Ernst & Young said it is important the issues of quarterly reporting and fair value principles are not confused with banks caught up in the US-generated subprime credit crunch. 'Although Hong Kong banks have not been exposed to subprime challenges to the same extent as banks in Europe and the US, there is understandably a reason why they are being cautious, when it comes to quarterly reporting, which could indicate short-term fluctuations.'

He continued that quarterly reporting should be looked at in the context that information is the basis of all rational decisions, including investment decisions. 'Less information increases uncertainty and risk, and investors accordingly discount the price they are willing to pay for shares. That increases the cost of capital for issuers, and makes them less competitive,' said Pogson.

Raphael Ding, assurance partner at Grant Thornton, is another Hong Kong-based accountant who believes that despite noises from the Hong Kong banking and business community quarterly reporting should be considered in terms of the benefits it can provide to investors.

Ding proposes that quarterly disclosure increases information value. 'The older the information, the less relevant and reliable it is in an investment evaluation,' said Ding. He also notes that under the terms proposed by the HKEC, most listed companies would be in a position to produce quarterly reports without substantial additional expense.

Reporting downside

However, while the concept of quarterly reporting has received a thumbs up from the professional accounting and reporting sector, some of Hong Kong's business groups are less than enthusiastic. In a letter to the HKEC, The Hong Kong General Chamber of Commerce (HKGCC) said its members believe these measures would add significantly to the burden of compliance while providing little, if any, additional value.

The HKGCC believes Hong Kong's principles-based accounting environment is not conducive to mandatory quarterly reporting. 'Implementation of mandatory reporting not only will significantly increase the risk of errors but also will result in continuous restatement of prior results, with an adverse effect on Hong Kong's reputation as a world-class financial centre.'

The letter went on to say that the unintended result of more frequent reporting would be likely to force companies to focus disproportionately on the short-term, to the detriment of their longer term planning and management. 'At a time when Hong Kong is encouraging its enterprises to move up the value chain and take a more active part in sustainable development projects. We need measures which encourage companies to think and act long term rather than short term,'

The Hong Kong Institute Centre for Financial Market Integrity (CFA Institute Centre) and the Hong Kong Society of Financial Analysts (HKSFA), which represents nearly 5,100 investment professionals in Hong Kong and mainland China has welcomed the plan to introduce quarterly reporting. The two professional bodies say they strongly support mandatory quarterly reporting for a number of reasons.

The CFA and HKSFA believe the quality of investment decisions can be no better than the quality of financial reporting, and a major factor in the quality of this information is its timeliness. The consequence of less-frequent reporting would be increased volatility of share prices, particularly prior to and immediately following the release of annual or semi-annual financial reports.

The two financial representative bodies also believe that while the required release of such financial information every three months will not eliminate the incentive for earnings manipulation or the incidence of fraud, quarterly reporting gives investors more opportunities to uncover any attempts to manipulate the financial reports. It also reduces the time in which insiders can consider how to manipulate what they report, thereby making the manipulation process more difficult and, therefore, more prone to errors and discovery.

Third, quarterly reporting reduces the likelihood that insiders will have time to take advantage of privileged information at the expense of external investors and shareholders. Neither the CFA nor HKSFA subscribes to the suggestion that quarterly reporting creates greater volatility in share prices. On the contrary, they said information is the lifeblood of financial markets. Without it, investors would be forced to make decisions in a vacuum, one that often is filled by rumor, innuendo, or falsehoods about corporate performance. The result of information embargos, therefore, is reduced knowledge among investors, leading to reduced trading activity and wider spreads.

Chris Davis is a freelance journalist based in Hong Kong, where he covers regional business, finance and environmental topics.