As investors continue to seek forward-looking guidance, audit committees need to understand the legal, market and reputational risks involved as part of their oversight role.
Why is this topic critical?
Audit committee oversight of forward-looking guidance is part of boards’ overall ongoing risk assessment process. For investors, forward-looking guidance continues to be a significant focus because of market demands for information, an uncertain and at times unpredictable economic environment, and an active regulatory environment.
Is forward-looking guidance required?
Public companies are not required to release guidance. However, the long-standing practice of doing so began with passage of the Private Securities Litigation Reform Act (PSLRA) in 1995. PSLRA provides companies a safe harbor when issuing forward-looking statements in SEC filings, press releases, investor presentations, and other public statements.
How common is it for companies to provide guidance?
The vast majority of companies provide some form of forward-looking guidance.
What are the pros and cons of providing guidance?
Whether guidance is useful continues to be debated. Some companies view the practice as a market necessity. Others believe earnings guidance provides little benefit and can present greater risk than reward. Companies should weigh the implications of providing guidance and the related pros and cons.
Key audit committee considerations
The nature and extent of forward-looking guidance inherently requires significant judgments and estimates, as well as consideration of associated legal, market, and reputational risks. In overseeing earnings guidance practices, audit committees should consider the following actions: