NEW YORK: In a climate where earnings releases are scrutinized in more detail than ever, the National Investor Relations Institute (NIRI) has released a list of suggested guidelines for public companies to follow when writing their quarterly earnings releases.
Earnings news releases are disseminated four times a year by nearly every public company, detailing the company's financial performance over the previous three-month period. These releases remain one of the primary points of contact between the nearly 7,000 US-based public companies and their shareholders.
The guidelines come as the IR community continues to attempt to rebuild investor trust after a series of high-profile financial scandals have left many investors feeling burned.
There have been suggestions that some management teams have chosen to use earnings releases to highlight the positive aspects of their businesses, while burying negatives deep in the releases.
"The problem that we saw was that there was such diversity in the quality of the earnings releases - and frankly, some just don't say very much," said NIRI CEO Lou Thompson. "We wanted to come out with a set of guidelines that put a floor under the process by providing our idea of the minimum standard for these releases."
Although earnings releases remain an important source of information for investors, their content is largely outside the domain of normal securities regulators, including the Securities Exchange Commission. The only major exception is when a release is proven to be fraudulent.
The NIRI guidelines have three major points. First, NIRI encourages companies to release a complete income statement (sometimes called a profit-and-loss statement) and balance sheet along with the release. An income statement lists the company's revenues, expenses, and resulting profit or loss during the quarter. A balance sheet lists a company's assets and liabilities.
Secondly, the guidelines ask companies to headline their releases with their GAAP results at the exclusion of other measures of financial performance.
GAAP earnings are the standard accounting procedures recognized by auditors and regulators. In recent years, many companies that were losing money would often bury their GAAP results deep in their releases and present investors with other financial measures, including so-called pro forma earnings - an informal measure of performance that allows management to strip out certain costs. This practice can sometimes paint a misleading rosy picture of a company's financial position.
Lastly, NIRI is pushing for the somewhat novel idea of asking companies to publish an abbreviated version of the management's discussion and analysis (MD&A) section found in the quarterly and annual reports each firm is required to file with the SEC. The MD&A is designed to provide investors with a narrative overview of a company's business model and overall financial position.
"We think this will give companies an opportunity to explain their business to investors in plain English," said NIRI's Thompson. "And when I say plain English, I mean plain English."
NIRI's new guidelines for earnings releases
- Include a complete income statement and a complete balance sheet with all earnings releases, as well as appropriate historical information to allow investors to make comparisons
- Put GAAP earnings up front and before pro-forma results. Only GAAP earnings should appear in headlines of a release. Pro-forma results should include an explanation as to how they were derived
- Include additional information that investors need or desire to evaluate a company's results, which is often included in the management's discussion and analysis (MD&A) of the 10-K and 10-Q filings. NIRI recommends that public companies either include a summary MD&A with their earnings announcement, or incorporate other critical information into the release.