Is a Quarter Better than a Half for American Finance and Football?

SEC Filing Requirements

There has been renewed talk about whether US publicly traded companies should be allowed to report earnings every six months rather than on a quarterly basis. In earlier days, beginning in 1934, the Securities and Exchange Commission (“SEC”) had the power to require periodic reports from public companies but did not specify the reporting frequency. Beginning in 1955, the SEC began requiring semi-annual reporting, which meant companies filed reports twice a year, for example as of June 30 and December 31. In 1970, the SEC established a mandatory annual and quarterly filing requirement.  

There may be some good reasons to go back to preparing semi-annual filings to get away from what at times is sometimes viewed as a short-term results-oriented market and management focus, however there are a lot of bad reasons to revert back to the stone age. Society has the people and technology in place to get it done and the technology is only going to get better. 

There is no one answer as to whether quarterly or half-yearly reporting is better; each method has distinct advantages and disadvantages depending on the perspective of the market participant – individual, investor, company management and regulator. The core issue in the debate comes down to balancing transparency and investor interest with both the positive and negative attributes of the current system.

Let’s look for inspiration from American football played in four quarters instead of two halves. For historical reasons, this addresses player fatigue and fairness related to field conditions. This article will discuss some of the decision-making factors in the debate and how some of the positive rules of football impact our American financial reporting system.

The Quarter System in American Football

The quarter system in American football was officially adopted by college football’s governing body in 1910 because of three areas of concern:  

1. Weather and Wind Direction and its impact especially on the passing and kicking games. By switching sides of the field after every quarter, both teams have two quarters of play in the same direction, preventing one side from getting and having a sustained weather advantage. 

2. Field Conditions – just like the weather, field conditions have a great impact on the game. The system allows each team to play both ends of the field twice so no one team has a constant advantage due to the turf conditions. Notwithstanding today’s use of artificial turf this analogy may not fully apply, however, there can be different bumps and bruises and dips on a turf field.  

For any New York Jet fan conspirators out there, you may remember “Tarp-Gate,” a 1983 AFC championship game between the New York Jets and Miami Dolphins. Heavy rains downed the Jets.  There have been accusations that Don Shula purposely left the tarp off the field to slow the Jets running game. This has been refuted by accounts that the Orange Bowl did not have a tarp but instead a field pumping system, that apparently was not plugged in. As I understand it, there is still no NFL rule on the requirement for a team to have a tarp.

3. Player Rest –  football is physically and mentally demanding, a high-impact collision sport. Breaks between quarters and the longer halftime are crucial for players’ safety and performance. 

The quarters continue to influence coaching strategy, player management, including how teams manage the game clock, make adjustments, and call plays. In essence, the quarter system in American football is designed to balance intense, physically demanding play with strategic opportunities for rest, recovery, and tactical adjustments, while also promoting fairness in gameplay. Does this sound familiar to anyone? 

Is Semi-Annual Reporting better than Quarterly Financial Reporting?

Moving from quarterly to semi-annual reporting could increase the risk of unintended communication or miscommunication of information and increase market speculation and volatility. If that were to happen, companies would need to become even more vigilant about how and when they communicate material developments. If you were to speculate that companies are window-dressing the quarters, what is going to be different at the half?

Quarterly reporting provides a number of positives for investors – greater transparency and trust because more frequent updates give investors a clearer more up-to-date picture of a company’s performance. This exchange of information builds confidence between the company and investor. Some traders may prefer a quarterly report because the earnings seasons create opportunities and threats they can focus on. The speed of communications today is blinding, and stakeholders can address and identify problems more quickly than in the past: more reason for companies to stay ahead of the others.

With all the benefits to investors there are a number of consequences for companies and management which at times focuses them on a myopic view of things in order to meet quarterly earnings targets and expectations. There is a significant administrative burden for companies preparing quarterly reports, which is a time-consuming and expensive process. However, generally no one is using green ledger paper, no one write systems anymore and companies regularly close their books on a monthly basis for timely financial information for management.  

Half-year reporting may reduce the pressure on a company to deliver a quarterly result and allow management to focus on long-term strategic initiatives. Less frequent reporting will reduce costs, and management can avoid making brash decisions as a result of quarterly pressures. However, there is going to be a six-month myopic perspective as well, and as I understand it from an accounting perspective, everything less than a year is not considered long-term. A six-month reporting period is myopic as well!

The 2002 Sarbanes-Oxley Act was a requirement to restore investor confidence and protect the public by ensuring accurate financial reporting and preventing corporate fraud. It was passed in response to scandals like Enron and WorldCom. Let us not forget all that messy stuff. The act mandates stricter financial controls, personal accountability for CEOs and CFOs independent audits and transparent reporting to enhance corporate integrity and trust in financial markets. While most European Union countries use a half-year reporting system it does not mean Americans should be driving on the left side of the road or using the metric system or playing American football in halves.

Conclusion

I think that most people would agree that the better option depends on the stakeholders’ priorities and for those investors, traders and regulators who want a lot of transparency and frequent updates, quarterly reporting appears to be the answer. For company management and those investors focused on long-term value maybe half-year reporting is better.  

For me, the quarterly system is best because it provides greater transparency and aligns with the 2002 Sarbanes-Oxley Act requirements. While there have been some criticisms of the quarterly report because of the increased workload, reality needs to be addressed; companies are regularly closing their books on a monthly basis in a detailed fashion. Yes, the quarter close is a time-consuming exercise and exercise is good, and no one should underestimate the time well spent. If it’s not broken, don’t fix it! 

Another solution could consider a compromise which would be close to the middle: a tri-annual 1/3 financial reporting period. Sounds like hockey to me!