Share ownership is broad-based in the US, where it is not unusual to hear of barbers offering unsolicited advice on shares. A more formal appraisal of the stock market is offered by an army of investment advisors operating independently or as employees of investment banks. It would appear that in the country with the largest number of shareholders, the great majority of them — individual as well as institutional — do not base their investment decisions on a personal examination of the periodic accounts received by them but rely instead on professional advice.
A a gas utility’s investment portfolio, in New Jersey in 1986 was managed independently by a lady operating from her home 3000 miles away in Los Angeles! Admittedly certain targets are given to advisors — such as the portfolio consistently outperforming the Dow Jones share index, and the retention of such advisors is dependent on their meeting these targets. Under the circumstances circulation of quarterly accounts by the US corporations seems a waste of money, but this is probably viewed by them as promotional advertising and is an expense that is thus justifiable and for them affordable. Is the same true for Pakistani listed companies?
Sometimes, even professional advice is suspect. Some advisors in the US were found recently to have privately expressed doubts over the quality of shares that they had themselves recommended as Buy or Hold. Most advisors are employed by the investment banks that earn huge fees structuring deals for major corporations, and such lucrative work would be jeopardized if a Buy or Hold recommendation was not made in respect of their clients’ shares. It is for this reason mainly that a Sell recommendation is rarely made.
The sudden and spectacular collapse of the energy giant Enron occurred despite the scrutiny of their audited accounts by the professional advisors and the circulation of quarterly accounts to the shareholders. It can be argued that the fallout from Enron could have been restricted and contained had the auditors earlier on alerted investors to the creative accounting in practice by the Enron’s management. However, as the dot.com bubble in the US proved, people followed a herd instinct in buying shares of the Internet companies (then touted by everybody as sure bets) even though many of these companies had not even developed their main product, let alone circulated their accounts — audited or unaudited.
In the case of Enron audited accounts contained mis-statements that necessitated a downward revision of the prior year’s earnings. Under the circumstances how useful are the unaudited quarterly accounts? Are company management under any legal obligation to explain to shareholders and regulators any major adverse variances that may arise between the results in quarterly/half-yearly unaudited accounts and those in the final annual audited accounts? How much care is exercised in ensuring the accuracy in interim unaudited accounts? Moreover, are these accounts used to knowingly paint a deceptively rosy picture, or worse still to gloss over harsh realities?
A case in point in the Pakistan Engineering Company Limited (Peco). Its accounts for the quarter January — March 2002 should have been circulated along with a 30 days supply of Prozac. It is so depressing to read that the sales for the quarter are a mere Rs11 million, whereas the cost of these sales totalled Rs42 million: a gross loss of Rs31 million! Proceeding further down the income statement one discovers that the total loss for the quarter is Rs63 million, or Rs700,000 per day! Of course this is dwarfed by the crushing total accumulated loss of Rs1,600 million, about 25 times the amount of shareholders’ equity!
How does a shareholder of Peco benefit from more frequent disclosure of such operating results? The chairman’s review is of not much help. In fact it is tantamount to rubbing salt in the wounds of the poor shareholders. “I am confident”, declares the chairman, “with the support and help of the government things will start changing soon for better tomorrow (sic)”. The only government help that specifies is the funding of Rs309 million which “helped in laying off about 1420 employees. More employees are in the process of being relieved for which necessary funds are being tapped.” Laying off employees is never a sign of good times to come.
The chairman is obviously living in cloud-cuckoo-land. “Your company has confirmed orders of more than Rs700 million, “he responds. “It is just a matter of execution of these orders to realize sales.” Easier said than done, because to execute these orders the company “immediately needs working capital for the import of raw materials and components, for which the management is pursuing with the banks to convince them to consider restoring/ enhancing company’s credit lines.”
Why can’t the government provide the working capital, if it is as keen to help as the chairman believes? Moreover, will Wapda keep on waiting indefinitely for processing of their “confirmed orders”? Maybe. Because in the unlikely event that the orders are processed Wapda will also keep Peco waiting indefinitely for the payment!
“I am confident,” continues the chairman in an irritatingly repetitive misuse of this word, “your company will turn around and will be profit and the next financial year will definitely be good for your company.” These assurances will no doubt be repeated ad nauseam in future periodic accounts in a quarterly ritual, and like all ceremonial rites will continue although devoid of utility.
There are so many other listed companies in varying stages of financial distress, and no purpose is served in placing on them the additional costly and humiliating burden of quarterly reporting to the shareholders. Moreover, many are unable to meet the 30-day deadline for their circulation. In the long run this may also prove counter-productive if companies would be unable to cope with the onerous corporate regulatory reporting requirements, surrender their public limited company status, and thus accelerate race for the voluntary delisting into a stampede.
This will be a big blow for Pakistani stock market. The SECP should reconsider this reporting requirement and withdraw it, or enforce it selectively.