The SEC may be about to blow up the quarterly earnings cycle. Here’s why CFOs are nervous.
Good morning. CFOs of public companies may soon need to rethink the cadence of financial reporting—and everything that comes with it.
The Securities and Exchange Commission is reportedly preparing a proposal that could allow U.S. public companies to report financial results semiannually instead of quarterly, with the agency expected to release the measure as soon as April, according to The Wall Street Journal. It would make quarterly filings optional rather than mandatory, though it has not yet been finalized or adopted.
I had a conversation with J. Eric Johnson, partner and co-chair of the Public Company Advisory Practice at Winston & Strawn, who told me that the topic is already generating debate among practitioners. “That’s actually one of the first things that comes up,” Johnson said, noting that his firm discussed the issue at a recent internal corporate luncheon.
Questions he’s fielding: What would an investor relations strategy look like? How do you maintain transparency? How do you stay in front of your investor base, telling your story, getting out in front of them, and continuing enthusiasm around your stock?
For over 50 years, quarterly earnings have given companies a structured moment to shape their narrative. Under semiannual reporting, that cadence disappears, Johnson said.
“Yes, some companies may save money,” he said. “They may save time. But you’re going to have to rethink a lot of things.” He continued, “The market participants, the investors, are going to demand information in some form or fashion.”
Johnson also raised concerns around Regulation FD, which prohibits selective disclosure. Under the current cycle, executives can speak more freely because financial results are fresh or imminent.
He added that semiannual reporting could strain board oversight. Audit committees are used to quarterly reviews with management and auditors. Removing that rhythm creates a governance gap, likely requiring informal quarterly check-ins—eroding cost savings. “Yeah, we didn’t print a 10-Q, but we’re still doing a lot of heavy lifting in the background,” Johnson said.
There could also be capital markets challenges, he said. Underwriters typically require very recent financial data, and a six-month cycle could leave information stale.
Shivaram Rajgopal, an accounting professor at Columbia Business School, doesn’t view the shift as beneficial. “It will save trivial compliance costs in the short run but lead to more demands on the IR groups for updates,” he said. “I suspect most well-followed companies will file quarterly statements voluntarily anyway.”
Smaller firms, however, may not. “In the case of smaller firms, insider trading might go up, and volatility in the stock will likely also go up,” Rajgopal said. “Surprises or sharp swings in stock prices will become more common.”
Johnson also warned of increased volatility. Less frequent reporting means negative trends could compound before disclosure.
“We had a 5% decline in revenue over three months, but now, when we talk about it at six months, it’s actually 10%,” Johnson said.
Rajgopal shared this anecdote: “I have heard a prominent board member say the following: ‘The market pays you 20-25 years of your earnings today (via the price-earnings ratio).’”
“And we hesitate to supply the market with quarterly data?” he continued, “That’s odd. Imagine hiring an employee and paying them 25 years of their annual compensation. How closely are you likely to monitor that employee? Just once in six months?”
Have a good weekend.
Sheryl Estrada
sheryl.estrada@fortune.com
This story was originally featured on Fortune.com