15 September 2009

SEBI proposals on financial disclosures - viva short term

SEBI's advisory committee on disclosures and accounting standards has come out with several recommendations for improvement of disclosures standards of listed companies. One of the proposals is to increase the frequency of the disclosure of the balance sheet from the current annual basis to a semi annual basis. This is being recommended on the basis of:

"In the wake of the recent global financial crisis and subsequent cases of global corporations going bust, the issue of solvency and not merely the profitability of entities come to the forefront from the shareholders’ perspective. It was felt that a more frequent disclosure of the asset-liability position of companies would assist the shareholders in assessing the financial health of the companies, thereby helping them in making informed investment decisions."

I disagree with the proposal. Firstly, none of the big crisis affected entities went under because of infrequent disclosures - they went under either because of unsustainable leverage or because of hidden liabilities. Secondly, the recommendation misses the quality of disclosures and seeks to remedy the problem of poor disclosures with making the poor disclosures more frequent. I also disagree with the recommendations because we are going in towards a more and more short term view of the performance of a company. In fact, even the quarterly profitability numbers in vogue today encourage the management of a company to play the stock market game of matching predictions of profitability - losing sight of the longer term operational goals of a company. We clearly don't need to import the short term philosophy of the American markets. Finally, we all forget the substantial costs of management time spent in preparing financial disclosures, which could be instead spent on improving the operations of the company - the proposal in my opinion fails on the cost-benefit analysis. Even if Satyam came out with its balance sheet on a quarterly or half yearly basis, we would still not be addressing the problem of the poor quality of its disclosures. We will just have trash churned out more frequently. We need a better enforcement of existing disclosures through forensic accounting by the regulator (or an agency appointed by the regulator till it forms a competent cadre of such persons within).

The recommendations titled "Discussion paper on proposals relating to amendments to the Listing Agreement" can be found here.

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