Financial Governance Bodies Announce Temporary Relaxation On Time Period For Reporting

Three authorities have announced time relief for listed companies to file reports during the coronavirus crisis, but Professor Meziane Lasfer is sceptical about the decision.

The Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) has announced temporary relief for listed companies facing the challenges of filing their corporate reports during the coronavirus crisis.

The joint action allows listed companies that need extra time to complete audited financial statements an additional two months to publish them, in addition to the four months from their financial year-end under the Transparency Directive. This means companies will not face listing suspensions if they publish financial statements within six months of their year-end.

Cass Business School’s Professor of Finance Meziane Lasfer questioned the decision and believes it could lead to several difficulties:

“The current pandemic is making life difficult for accountants to fully prepare accounts and auditors to comprehensively audit them, but while this extension is understandable it also leads to a number of drawbacks.

“Firstly, it will impact upon market efficiency because analysts will not have the most up-to-date information to value companies. Many UK companies only produce year-end audited financial statements, which already increases asymmetries in information and leads to misevaluation of securities in the market.

“Another reason is an almost certain increase in volatility. We have recently seen markets experiencing swings that have not been seen since 2008, or even 1929. The delay in information disclosure will only exacerbate market uncertainty.

“It will also lead to insider trading controversies. Legally, insiders are not allowed to buy or sell shares in their companies for around three months after year-end, which is generally the time of disclosure of financial statements. The delay extends this period further, and reduces the time under which insiders can trade.

“Finally, since dividends are paid after financial statements are released, investors – particularly pension funds – will see their dividend income decline. Since investors are not likely to sell, given the drop in stock prices, they will have problems generating income. In the case of pension funds this could lead to problems in paying pensioners.

“It also raises additional questions of who is responsible for implementing this. If it is optional and up to managers, they may take advantage of this to delay bad news if auditors are unable to audit accounts.

“It also isn’t clear why the extension is only two months. If the situation becomes more complicated in the next two months and people – including auditors – can’t go back to work, will this time be extended? This will exacerbate the drawbacks mentioned above."

Professor Meziane Lasfer, concluded: “Overall, while the measure may appear rational, it does raise concerns. The authorities should provide further detail to alleviate these concerns.”