Malaysian PLCs quarterly financial reporting - true or biased?

Malaysian PLCs: Quality of
unaudited financial reporting
Are companies diligently and accurately reporting the unaudited
quarterly financial statements to investors or are such reporting only
taken seriously in the last quarter of the financial year? This brief
analysis aims to see where the land lies with regards this vexing issue.
Chief questions:
1. How prevalent are large negative surprises or adjustments in Q4
when the conditions for such adjustments may have existed prior
to Q4?. Often this ‘come clean’ attitude stems from fear of
regulatory action if unaudited annual results differs by 10% or
more from audited?
2. Alternatively, how prevalent are over-prudent reporting in the
first 3 quarters, with large positive earnings swings in Q4. This of
course lends to positive market sentiment, beating analysts’
estimates, and possibly attendant positive remuneration
ramifications for Management.
Method in brief:
u Scope – top 50 Bursa Malaysia companies
u Analysed the average quarterly profit for the first 3
quarters and compared that against Q4
u Reporting line used was “Profit for the Period”
u Where Q4 profit reported was significantly lower (>10%)
than the average profit for the 1st 3 quarters, the variance
between the revenues of the corresponding period (Q4 vs
average of 1st 3 quarters) was analysed.
u Where the revenue had similarly fallen, these companies were
excluded.
u However, where the revenues had in fact increased or the fall
in revenue seemed insignificant relative to the fall in profit,
these instances have been highlighted in AMBER in the Annex on
page 7 onwards.
Copyright and All Rights Reserved - Sharath Martin
Are we taking our responsibility to investors
seriously?

Method in brief (contd.)
u Conversely, to gauge the prevalence of overly prudent
financial reporting in the 1st 3 quarters, we looked at
instances where Q4 profit was significantly higher (>10%)
than the average quarterly profit of the first 3 quarters.
u Where the revenue had similarly increased during the relevant
periods, these companies were excluded.
u However, where the revenues had in fact fallen or the increase
in revenue seemed insignificant relative to the increase in
profit, these instances have been highlighted in YELLOW in the
Annex onpage 7 onwards.
u This analysis was extracted based on reports to Bursa as of
April 7, 2017 (cut off date). Reports filed after that date
were not taken into consideration.
u As the intent of this analysis is not to “name and shame”,
the names of companies have been omitted.
u Attempt was made to ascertain and remove companies
which may been affected by the significant RM
depreciation in Q4
u It has to be appreciated that this analysis is only on the
basis of disclosures made and necessarily lacks in-depth
insight which would only be the privy of management.
Malaysian PLCs: Quality of
unaudited financial
reporting
Are we taking our responsibility to investors
seriously?

Should investors be concerned?
16 out of the top 50 companies results
announced in 2016 had significant profit changes
in Q4 relative to past quarters which do not
appear to be explained by changes in revenue
11 of these companies showed significant
improvement in profits announced in Q4
unrelated to revenue changes or other events and
conditions announced in the quarter, suggestive
of possible over-prudent financial reporting
practices in earlier quarters.
5 out of the top 50 companies (2 out of the top
10 companies, 4 in the top 20) of these
companies showed significant profit decline in Q4
unrelated to revenue changes or other events and
conditions announced in the quarter, suggestive
of possibly delaying bad news till Q4.

What should we do
Boards and their Audit Committees
u Boards and ACs should be sensitive to this issue, i.e. are their companies
accurately reporting quarterly results vs. possibility of ‘earnings
management’ practices being adopted.
u Board members, particularly those who are not financially trained,
should appreciate that ‘earnings management’ practices, whether
positive or negative, are unethical and in the context of Malaysia, illegal
(given that Malaysian Financial Reporting Standards have the force of
law).
u Are Board members asking the right questions of Management on strategy
and budgets vis a vis achievements by quarter the following year?
u Are Boards aware of the heightened scrutiny by regulators – see below?
CEOs and CFOs
u What messages do they send, explicitly and implicitly to their people
that influence the reporting of revenues, missed targets, profitability?
u How do they manage against selective information being provided by
Business Unit leaders, only for real, not-so pleasant facts and
circumstances to surface soon enough?
u How often are budgets and strategies set for the coming year with high
optimism and energy levels (and agreed to by Boards) only for Q1 and 2
results to come in disappointingly?
Investors
There is also a role for investors, particularly institutional investors to play
here.
u Through a more active role, they should question their Boards and CEOs
on the strategy and budget-setting process, particularly on large
investments/capital expenditure.
u Weigh in on management’s performance reward and the critically
important area of succession planning.

What should we do
Regulatory scrutiny
In 2016, the Securities Commission’s issued
133 Infringement Notices to PLCs for non-compliance with
requirements related to the submission of financial reports
and approved accounting standards.
And that stricter sanctions will be imposed in the future
against companies for repeated non-compliance.
In 2015, there were only 4 such notices issued.
Clearly, the regulator means business.
Shouldn’t Boards and Management take heed .. and quickly.

General caveats
u It is to be acknowledged that preparation of financial
statements is indeed challenging and complex in today’s
reporting environment
u Concerned investors should therefore engage more closely
with the companies to better understand their financial
statements reported
u The role of institutional investors in this regard is
fundamental
u This analysis is only with regards to reporting by the top 50
companies where their financial year ended during the
year 2016. To better gauge instances of management bias
towards overly prudent financial reporting or delaying
surprises till Q4, this analysis should be extended to longer
financial periods.
u It is hoped that the analytical framework set out here
provides a suitable starting point for this purpose.
u This does not mean that the annual numbers are off, rather
when the numbers reported in Q1 to Q3 may not be fully
reflective of conditions present in those quarters.
u Auditors are typically concerned with the full financial year
end numbers and do not express an opinion on the
accuracy or quality of unaudited financial information
reported in the first 3 quarters.

Profit for the period (RM'000) Revenue (RM'000)
Variance btwn
average of cum 3
prev qtrs and Q4
%
Variance btwn
average of cum 3
prev qtrs and Q4
%
1 945,467 14% 108,181 1%
2 (125,067) -2%
3 243,214 5%
4 303,333 9%
5 756,160 29% 983,037 9%
6 (345,611) -57% 168,002 7%
7 2,333 0%
8 (581,803) -89% 530,765 10%
9 38,988 2%
10 (39,758) -1%
Annex: Malaysian PLCs: Quality of

Variance btwn
average of cum 3
prev qtrs and Q4
%
Variance btwn
average of cum 3
prev qtrs and Q4
%
11 (44,717) -3%
12 (264,769) -9%
13 1,706,088 38% 215,470 5%
14 110,253 6%
15 (316,733) -49% (155,633) -5%
16 1,278,629 46% 66,716 3%
17 (25,301) -2%
18 31,735 3%
19 (64,469) -11% 295,742 10%
20 (192,100) -18% (18,786) -2%

Variance btwn
average of cum 3
prev qtrs and Q4
%
Variance btwn
average of cum 3
prev qtrs and Q4
%
21 (220,239) -13% (152,203) -6%
22 304,923 28% (30,865) -3%
23 (123,120) -19% (21,326) -2%
24 328,328 17% (636,025) -16%
25 112,843 5%
26 (5,663) -1%
27 (15,064) -2%
28 (51,525) -4%
29 145,346 20% (131,313) -14%
30 245,687 21% (531,310) -20%

Variance btwn
average of cum 3
prev qtrs and Q4
%
Variance btwn
average of cum 3
prev qtrs and Q4
%
31 (8,628) -1%
32 (237,914) -27% (153,327) -12%
33 25,114 34% 49,123 5%
34 (299,280) -145% (133,348) -7%
35 164,730 15% 180,641 25%
36 317,135 35% 710,010 67%
37 (62,339) -16%
38 153,809 42% 191,192 59%
39 3,861 1%
40 (28,886) -2%

Variance btwn
average of cum 3
prev qtrs and Q4
%
Variance btwn
average of cum 3
prev qtrs and Q4
%
41 (3,645) -1%
42 180,284 30% 926,997 100%
43 13,661 3%
44 (33,143) -9%
45 (2,444) 0%
46 (58,794) -3%
47 59,995 8%
48 19,660 25% (2,239) 0%
49 25,964 4%
50 (882) 0%

Malaysian PLCs quarterly financial reporting - true or biased?

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