So, the Oracle of Omaha says.....

[Clone]

In my megacorp it was a routine practice to not cut checks during the last two weeks of the quarter. Guess what some of the suppliers did? They simply didn’t ship us.

I used to do some free-lance work for a major broadcaster. At one point, I was waiting close to 6 months to get paid for some work. I finally pulled my ace card (I knew the president of that division on a casual basis), and asked him to put a fire under their accounting folks. One of the accounting managers (who had helped me out on a job site during his first day with the company) called me back. He said- "Don't take it personally, we don't even pay the power company until they threaten to disconnect us!" I heard from one of the satellite truck operators that Madison Square Garden had refused to let them on the property until they paid their bills.

Many companies would not sell them anything without cash on the table. Those that provided services (such as myself) jacked their rates substantially because you knew it would take a long time to get paid. I don't get it, in the end, this will end up costing you more money.

I have seen end of the quarter numbers juggled by trucking partially completed product off the property so that it could be marked 'shipped'. Then, a few weeks later they would haul it back into the factory and finish the assembly. Likewise, just before the end of the quarter there would be a flurry of receiving crates of material so that the expenses could be accounted for during the present quarter. Then the actual product would show up a few weeks later. During the last two weeks of the quarter, sometimes no product crossed the line to the trucking companies until after the first day of the new quarter. Pulling (or pushing) sales or expenses a few weeks allowed them to massage the numbers so they could get one more quarter of record profitability. Or in one case, just slightly miss some targets and lower the bonus or 401k match. Sometimes this might affect what was in the quarterly report, but most of the time I think it was a competition between the assorted factory managers.


I had a memo at one time (I wish I would have kept it...). "We are not going to report the warranty numbers at (some important meeting). Instead, we are going to show a slide indicating what the warranty numbers would have been, if we had actually reported them." (What!!?) I think that it meant the numbers were so bad, that they did not want them documented in some more official report. They would talk about them, just not write them down!!


"Gung Ho" with Michael Keaton was perhaps more of a documentary than some of our upper management wanted to acknowledge!

 

[MooreBonds]

I have seen end of the quarter numbers juggled by trucking partially completed product off the property so that it could be marked 'shipped'. Then, a few weeks later they would haul it back into the factory and finish the assembly. Likewise, just before the end of the quarter there would be a flurry of receiving crates of material so that the expenses could be accounted for during the present quarter. Then the actual product would show up a few weeks later. During the last two weeks of the quarter, sometimes no product crossed the line to the trucking companies until after the first day of the new quarter. Pulling (or pushing) sales or expenses a few weeks allowed them to massage the numbers so they could get one more quarter of record profitability. Or in one case, just slightly miss some targets and lower the bonus or 401k match. Sometimes this might affect what was in the quarterly report, but most of the time I think it was a competition between the assorted factory managers.


I had a memo at one time (I wish I would have kept it...). "We are not going to report the warranty numbers at (some important meeting). Instead, we are going to show a slide indicating what the warranty numbers would have been, if we had actually reported them." (What!!?) I think that it meant the numbers were so bad, that they did not want them documented in some more official report. They would talk about them, just not write them down!!

Would any of this have changed if you reported once a year instead of once a quarter?

 

[Running_Man]

One point to remember: The longer the reporting period, the harder it is to fiddle the books (short of crime) in a material way. It is easy to fiddle things like sales and inventory on a quarterly basis, but the fiddles are limited and are 1/4 as effective in tuning the annual numbers.

I guess the other point is that IMO quarterly numbers are not very important to investors. To traders, OTOH, they are mothers' milk, as are any "guidance" or other preview numbers. Since stock prices are affected by traders on a quartely basis, there is always the chance that a lucky guess based on all these meaningless numbers will produce three cherries on the trading slot machine.

If by 4 times a year management holding a meeting to describe what they expect to do with the money you have invested in the company and their near term and long term plans, in a summary fashion that takes about an hour, is considered to be feeding “speculation” in the market because that causes your managers too be too dishonest to meet those targets, why would those same managers suddenly become honest if they only have to update you once a year.

People need to go back to 2012 and look at whatJP Morgan did when Jamie Dimon ran the trading desk and had the trader known as the “Whale” and during quarterly investment reporting, called the questions that arose on a conference call about trading valuations when they had a 719 million dollar loss a “tempest in a teapot” a year later JP Morgan pleaded guilty to securities fraud restated over a year’s worth of reporting and reported instead of the 719 million dollar loss a 6 billion dollar loss. Quarterly reporting, that Jamie Dimon hates, is what started the questions because the answers given on the quarterly call did not match with what maangement was claiming and caused the SEC to investigate. Perhaps Dimon and Buffet would like not having to answer uncomfortable questions from their investors 4 times a year and prefer to meet in private and give updates to those who have enough invested to hear what the plans are, for me the quarterly calls are the single biggest insight into a company.

 

[OldShooter]

If by 4 times a year management holding a meeting to describe what they expect to do with the money you have invested in the company and their near term and long term plans, in a summary fashion that takes about an hour, is considered to be feeding “speculation” in the market because that causes your managers too be too dishonest to meet those targets, why would those same managers suddenly become honest if they only have to update you once a year. ...

There are couple of reasons that annual numbers are more reliable and representative than quarterly numbers. As I mentioned before, the small "fiddles" that companies regularly do to window-dress their quarterly numbers have smaller effect when run against annual numbers. Also, annual numbers are the basis for tax returns and auditors' opinions, which puts a damper on the fiddling. (None of this applies if outright fraud is occurring.)

Also, you have to understand that unless you bought on an IPO or other offering, you do not have any money "invested in the company." While theoretically the company has obligations to you, as a practical matter you are nothing but a few bytes of data spinning on a disk. Management has no interest in what you think and you have no influence on what they do. While they may theoretically "owe" you explanations you have no way of cashing that check. If you don't believe that, try getting an appointment with the head of Citibank after explaining that you are a shareholder.

The pernicious effect of quarterly reporting is not the hours (not "an hour") that companies put into reporting and meeting, it is that being forced to pay attention to quarterly numbers leads to very short-sighted management. Instead of worrying about things like exploiting macro trends and optimizing the operation of the business, they are forced to explain statistically insignificant variances to, as I said, analysts who have never managed as much as a one car parade. Take for example, a building supply superstore like Home Depot or Lowes. Their top lines in the first and second calendar quarter are hugely affected by weather. A cold spring will move revenue forward by a month or more -- maybe from one quarter to the next. A hurricane will give them a revenue spike and, possibly, a COGS spike. None of this matters a whit to the long term business. Remember Ben Graham; the value of the business is the value of its future discounted cash flow. "Future" is a long time. OTOH, if you are a trader you are simply working with the greater-fool theory plus hoping to get three cherries on the slot machine of guesswork. To you, the quarterly excitement offers volatility and hence happiness.

 

[MichaelB]

There are couple of reasons that annual numbers are more reliable and representative than quarterly numbers. As I mentioned before, the small "fiddles" that companies regularly do to window-dress their quarterly numbers have smaller effect when run against annual numbers. Also, annual numbers are the basis for tax returns and auditors' opinions, which puts a damper on the fiddling. (None of this applies if outright fraud is occurring.)

Numbers are numbers. Going from quarterly to annual does not make the numbers any more reliable. Either they are or they aren't. Frequency has no effect on trustworthiness and financial engineering is a continuous process.

 

[pb4uski]

^^^^ Sort of. Our quarterly results were good and solid, but we put forth extra effort for year end numbers.... more details are reported and those numbers are subject to more scrutiny by outside auditors and regulators so we wanted to make sure they were as good as they could be.

One additional aspect favoring (monthly or) quaterly reporting... since you do it more frequently you get better at it and it becomes more cost effective to automate something that you do (12 or) 4 times a year vs once a year.

 

[MichaelB]

^^^^ Sort of. Our quarterly results were good and solid, but we put forth extra effort for year end numbers.... more details are reported and those numbers are subject to more scrutiny by outside auditors and regulators so we wanted to make sure they were as good as they could be.

We're talking different things.

Quarterly earnings disclosures are highlights of key financial indicators, and they aren't audited. Annual financial reports are legal requirements, and they are audited. If management is massaging or engineering the numbers, they will do so monthly, quarterly, annually, or however often is needed. The key word is not "quarterly", it is "engineering".

Once again, the OpEd by Buffet/Dimon is to stop quarterly forecasts, not reporting. I agree with your second paragraph, the reporting should not be a big deal for an organization with the systems in place.

 

[ERD50]

....

I had a memo at one time (I wish I would have kept it...). "We are not going to report the warranty numbers at (some important meeting). Instead, we are going to show a slide indicating what the warranty numbers would have been, if we had actually reported them." (What!!?) I think that it meant the numbers were so bad, that they did not want them documented in some more official report. They would talk about them, just not write them down!! ...

This could possibly have something to do with compliance, and some requirements for a public company to make certain information public.

I recall some meetings we had where they would show some financial trends, but w/o the scale shown. Something about if they showed us the numbers, they'd have to make them public. Maybe because there were some employee stock buying programs going on, so this would be interpreted as showing some stock holders info, so they have to show everyone? Just a guess.

-ERD50