Academic journal article Journal of Corporation Law

Periodic Financial Reporting-A Relic of the Past

Academic journal article Journal of Corporation Law

Periodic Financial Reporting-A Relic of the Past

Article excerpt

I. INTRODUCTION When it comes to the disclosure of financial information, public companies and the investment community are working within the confines of a system created nearly seventy years ago. This system requires public companies to generate and file financial statements with the Securities and Exchange Commission (SEC) on a quarterly and annual basis.1 The SEC requires updates only when certain material, current developments occur.2 There have obviously been numerous changes in the investment landscape since the 1930s and a system created so long ago may not adequately reflect today's technological advancements and changing economy.3 To address this concern, the Senate Banking Committee's Subcommittee on Securities held a Hearing on Adapting a 1930s Financial Reporting Model to the 21st Century on July 14, 2000.4 The testimony from various experts revealed a common theme: the current system needs an IMAGE FORMULA4

overhaul. Michael R. Young, a partner at the law firm of Willkie Farr & Gallagher, explained that financial markets demand real-time data and that the "periodic" system is not adequately meeting these demands.5 Investors therefore turn to analysts' earnings predictions for this information.6 Relying on analysts and their expectations, Young asserts, leads to a host of problems including "accounting fraud, improper earnings management, operational inefficiencies, unnecessary stock market volatility and an increase in the cost of capital."7 The critical question becomes: can a new financial reporting system that relies on the dissemination of real-time data adequately address these concerns, and, if so, what are the obstacles to implementing such a system?

To begin to answer this question, Part II of this Note provides a short history of securities regulation. Part III explains the current rules and regulations pertaining to periodic financial reporting. Part IV describes the regulatory, legal, and technological context surrounding the current financial reporting system. Part V analyzes whether the present system adequately meets the demands of today's financial market participants and, if it does not, whether real-time financial reporting presents a plausible solution. Further, Part V addresses the benefits and burdens of moving to a system of real-time reporting, and the impediments, if any, to either adopting a new system or adapting the present system. Finally, Part VI recommends one possible way that a move to real-time financial reporting could proceed.


A brief historical overview of securities regulation is helpful because it provides a point of reference for hypothesizing a real-time system. This section describes both the states' and the New York Stock Exchange's (NYSE) efforts to regulate securities markets and why these efforts ultimately led to a need for federal regulation. Additionally, it describes Congress's attempts and ultimate success in enacting federal securities regulation, namely the Securities Act of 1933. Last, it explains why there was a need for Congress to buttress the 1933 Act with the Securities and Exchange Act of 1934.

A. State Securities Laws

Today's financial reporting requirements find their roots in federal legislation, namely the 1934 Act.8 However, before Congress passed federal legislation, the states regulated securities through "blue sky laws."9 The states focused their legislation IMAGE FORMULA8

primarily on the quality of the companies offering the securities and took more of a "hands on" approach to investor protection.10 This type of legislation proved ineffective for a number of reasons.11 One reason for the ineffectiveness of blue sky laws was that companies could evade these laws by offering their securities for sale across state lines.12 Another reason for the ineffectiveness of state schemes was the lack of sufficient funds and absence of specialized agencies to enforce the laws. …

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