Harvey Pitt, former chairman of the Securities and Exchange Commission, thinks that a new layer of information on current business trends should be added to periodic reports to create an enhanced, split-level financial reporting system.
Under such a system, “you wouldn’t get rid of periodic reporting,” Pitt told CFO.com, “but overlay onto that information the kind of information that more sophisticated investors demand and receive.” For instance, if a company chose to cut back on production because its sales dipped below normal in a certain region for an average month, it could disclose to investors the information and thinking behind its decision, he said.
Finance chiefs are squarely at the information hub, maintained Pitt, who’s now chief executive officer of business consultancy Kalorama Partners. CFOs can assess the importance of a given piece of information, he added, then report on how it “translates into significant corporate decisions.” Currently, said Pitt, ordinary shareholders are deprived of the kind of trend information that venture capitalists routinely use to make decisions on funding private companies.
Regulating such a system, however, could be tricky. That’s because companies would have to be able to release “forward-looking” information without yielding up proprietary or competitive information or unnecessarily exposing themselves to liability, according to Pitt. Another possible issue: Confusing the public with too much information.
Pitt outlined his ideas for a “bifurcated” reporting system during an interview focusing on the SEC’s recently issued rules trimming the 8-K filing time to four business days; the previous standard had been five business days or 15 calendar days. The need to report significant financial events so swiftly places “a premium on internal procedures that assure a very rapid flow of information from the far corners of the corporate universe to a central location,” he noted.
How ready are companies to comply with the new “real-time” reporting requirements by the SEC’s August 23 deadline? While most companies think they’re ready, the checklist approach that many of them might be using could lead them to fall short of full compliance, according to Pitt. “A lot of companies are taking the approach that there are finite obligations they have, and all they have to do is meet those obligations,” he said. “We have advised clients that they need to start thinking about moving on their own to a much more current disclosure system.”