Earnings Guidance

Progressive
Coca-Cola
McDonald’s
AT&T
Safeco
World Savings & Loan
Mattel
Gillette

What do these companies have in common? Clearly it isn't industry, structure or size. And while they are all publicly traded companies, that isn't their only similarity.

None of these organizations provides earnings estimates to analysts or other outsiders. Some have followed this policy for years, and others made the decision recently. Each had its own reasons for discontinuing the long-standing practice among publicly traded companies of providing earnings guidance to outsiders. Some have cited concerns over the regulatory environment; others have raised questions about how such guidance influences senior management's commitment to financial reporting. Still others believe that they are attempting to refocus management on the achievement of long-term goals rather than short-term results and stock prices.

Providing earnings estimates is an important area for discussion as investors may punish companies that fail to meet such estimates. In addition, investigators charged with understanding the corporate failures of the past two years have raised concerns about the preoccupation with meeting expectations among senior management at many companies.

On the other side of the debate, some doubt that stock volatility will be reduced by a trend to eliminate earnings estimates. Investors may continue to react sharply to earnings that reflect significant fluctuations. Some analysts and investors have also questioned the motives of certain companies that recently decided to eliminate or significantly scale back forward-looking information. Global economic uncertainty has hurt the operating results of many public companies, making it difficult to meet earnings estimates provided even six to eight months prior to the release of the actual results.

Deloitte's Point of View

Ideally, the earnings news release should be issued simultaneously with the release and filing of the financial statements and MD&A.

When this is not the case, some challenging issues arise. The audit committee may be in a difficult position if a company issues a preliminary earnings release prior to the audit committee’s review of the financial statements and MD&A. In these circumstances, the earnings news release should clearly state that all financial information contained in the release is preliminary, unaudited and, therefore, subject to change. When the audit committee actually reviews the final financial statements and MD&A, it must take care also to review the previously-issued earnings release. If the earnings release has not adequately or appropriately reflected the financial statements and MD&A, then another earnings release must be issued.

We do not agree with the practice of issuing a preliminary earnings release, except under exceptional circumstances. In our view, the earnings news release should only be issued when the financial statements and MD&A have been finalized, the work of the external auditor is complete, and the information is ready for filing with the appropriate regulatory authorities.

In reviewing the earnings news release, the audit committee must balance its "due diligence" responsibilities with the natural desire of its members to impose their personal preferences on the way information is expressed. If the audit committee has been diligent in reviewing the financial statements and the MD&A, then its review of the news release should focus on whether or not it is consistent with the financial statements and the MD&A and whether or not it contains the appropriate message to the investment community.

The Kerr v. Danier Leather decision is of great importance to issuers and their officers and directors, both in its direct impact on the scope of statutory civil liability for prospectus misrepresentation, and on the guidance or direction it may provide in relation to the new regime for statutory civil liability for secondary market disclosures, in effect in Ontario as of January 1, 2006.

In reviewing the earnings news release, the audit committee should satisfy itself that the release:

• highlights the important messages, both good and bad;
• expresses the same facts that are presented in the financial statements and MD&A in a manner consistent with their presentation in the financial statements and MD&A; and
• expresses conclusions about the reported financial performance and financial condition that are consistent with those that could be derived from reading the financial statements and MD&A.