A Prelude to Corporate Transparency

Following the recent abolition of earning per share forecasts, publicly traded companies have been publishing their descriptive performance reports on www.codal.ir as per the Securities and Exchange Organization’s new directive.

This is a step in the right direction, but a very shaky one as it highlights the companies’ impotence to provide investors with adequate performance and financial data.

The SEO’s decision to abolish EPS forecasts has come under fire by some market analysts and investors in the past few weeks, arguing that the SEO is depriving them of the one trusty tool available to forecast the stocks’ future performance.

A recent report in the  Persian-language Donya-e-Eqtesad economic newspaper, however, points out that critics are missing a key point: EPS forecasts, often with deviations of up to 466% from actual realized profits, were simply used as a tool to mask companies’ opaque conditions, and now the new descriptive reports are proof of this.

“What is published by some corporations as EPS forecast is simply meant to deceive investors and manipulate share prices,” a certified public accountant, Sarkis Abarahamin told ILNA. “Instead of basing trade on unreliable data, investors should study the firms’ audited financial statements, sales reports and descriptive corporate reports,” he added.

According to SEO data, about 65% of publicly traded companies forecast a higher fiscal year earning than they actually realize by the yearend.

Implemented as of January 6, the SEO’s measure seeks to push investors toward becoming more analysis-oriented using descriptive corporate reports.

But the descriptive reports are no good substitution as they barely include necessary, up-to-date information required for proper analysis. Ironically, it takes more transparency to show how opaque something is.

One of the critics’ pointed attacks is that lack of a public EPS forecast could potentially cause certain larger, institutional investors to gain unfair access to vital corporate information before the rest of the market does. Therefore, a ‘hidden EPS forecast’ will persist in the absence of proper deterrents.

The Donya-e-Eqtesad report argues that the removal of forecasts, inherently a positive move toward transparency, will not lead to rent-seeking but rather expose corporate structures.

For instance, certain petrochemical and metal producers fail to provide adequate information on their feedstock prices, claiming that price discoveries on Iran Mercantile Exchange are already showing the prices. This is while the IME and free market prices often vary by a wide margin, and companies’ initial quarterly reports intensely deviate from their audited final versions.

On another front, vegetable oil product sale prices are quoted in reports without considering the final discounts, which has repeatedly prompted them to shrink their earnings by the end of each fiscal year. Dairy producers have also done the same, as fluctuations in certain products’ prices, such as cream, have always been left either unexplained or unreported.

If the data companies present to investors are inaccurate, there’s not much need for analysis and decision-making.

And After all who gets to see the proper data firsthand? Apparently, investors close to the management and at the higher echelons of the  company’s power structure.

Removing EPS forecast hasn’t done much yet, but it has at least reminded the market how things work. The next step would be increased public demand for more transparency in descriptive corporate reports.