Four times a year, journalists venture into the wilderness of financial statements on the hunt for the true state of the region's publicly traded companies. Unfortunately, they are often denied a closer look because of a lack of uniformity among these companies about how they report their financial positions.
A typical situation goes like this: A company issues an unexpected press release after 5pm with a careful selection of numbers relating to the previous three months. Then the dozing newspaper and wire reporters scramble to get a sense of their meaning, but generally fail to get much more information and end up focusing on how the net profit compared to the same quarter in the previous year. What would increase the ability of journalists and financial analysts to accurately report on the situation at these companies is if they uniformly released an audited financial statement - a detailed document that often exceeds 40 or 50 pages - at the same time as their announcements.
But as the Emirates Securities and Commodities Authority (ESCA) does not require this, few companies bother. Instead companies issue reports that range from a few lines to a full interim report with some greater level of detail. All ESCA requests is that companies make an announcement about their financial position within 30 days of the end of the quarter. The full statements are required to be submitted within three months of the end of the quarter.
The quality of financial information is about more than making the lives of business journalists and financial analysts easier. It has wider impacts on the economy and the perceived risk of companies. If an institutional investor from abroad does not get enough information, then it will require a premium from that company before it will invest in it. The riskier an economy seems, the less likely that money will flow there and support new businesses.
"Information is the prerequisite for making intelligent investment decisions and investors can't evaluate what they can't see," says Oliver Schutzman, the chief communications officer at Shuaa Capital. "That's why it's extremely important to provide an adequate level of detail on the financial position of a company." Of course, the very ability of financial statements to accurately convey a company's standing is being questioned on the global stage as watchdogs and political leaders search for the causes of the global economic recession. Consistency in reporting data is just a strand of the larger discussion.
"The great debate is coming up with one set of financial rules that can be used to prepare all financial statements that are widely understood and can be used to make proper financial decisions," says Amanda Line, the regional director of the Institute of Chartered Accountants in England and Wales. By using the international financial reporting standards (IFRS) as opposed to the generally accepted accounting principles (GAAP), the financial position of a company can look quite different, she says. Companies in the Gulf can use GAAP, IFRS or a variation of GAAP used in Saudi Arabia.
When it comes to financial reporting in the region or anywhere, Ms Line says the most important qualities are transparency and consistency. But the demand for these things should come from investors who refuse to tolerate less-than-adequate information. "We have confidence that investors will become increasingly strong and an important part of the way the markets function here," she says. "The onus is on them to become better educated and ask better questions, and not be as accepting of the answers."
Two recent reports from companies in the property sector provide a small example of the differences in quarterly reporting. One issued a press release and a one-page consolidated income sheet. The other sent out a press release and an audited 16-page report that included income and cash flow statements, its balance sheet and notes that explained some of the numbers in greater detail. Earnings statements should be "more than communicating periodic information", says Domluke da Silva, a spokesman for the local branch of the Certified Financial Analyst Institute.
"When companies release this information, it should be a complete set of information," Mr da Silva says. "Many companies just release a few numbers and it's really not helpful from the investor's perspective." Press announcements about the previous quarter and the full financial statements should be released simultaneously, he says. "It's what's good for the market." Another issue is that many of the companies send out their numbers and then do not make themselves available for more specific questions about the future of the company, according to Chet Riley, an analyst at Nomura Securities.
"In the real estate sector, you get much more disclosure in the United States, Australia and the UK," Mr Riley says. "When they report their numbers, whether its quarterly or full financials, you always get much more detail. You get information about yields, location of properties, leasing information ? This is important for bringing in institutional investors." For analysts, additional commentary usually comes in the form of a conference call with the company's top executives, including the chief financial officer.
Some companies, such as Sorouh Real Estate and Deyaar Development, have made significant improvements in transparency over the last two years. In a distinctive move, Sorouh even releases its financial statements before the markets open to allow the data to be digested over a full day. The added layers of information in the full financial statements are important for not only checking the announcements from companies, but to find out if they are only giving one side of the story.
bhope@thenational.ae