Forward-looking guidance

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Boards should weigh the pros and cons of providing forward-looking guidance

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.

Audit committee questions and considerations on forward-looking guidance

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:

  • Understand management’s philosophy – to ensure the practice supports management’s focus on the long-term value drivers and is consistent with compensation incentives
  • Evaluate management’s rationale for providing guidance – to understand market pressures and evaluate how management has weighed the advantages and disadvantages of providing guidance—or the extent of such guidance
  • Understand management’s processes – for (1) developing assumptions and estimates, (2) accumulating guidance information, and (3) ensuring the process is robust and management judgments are reasonable
  • Review management protocols – for providing guidance, including use of non-GAAP information, and guidelines for updating quarterly guidance for both positive and negative material changes
  • Periodically revisit company policy – as trends evolve, market views fluctuate and related risks change
  • Benchmark peer and competitor practices – to help evaluate the nature and extent of guidance provided and to evaluate whether the company is an outlier
  • Inquire of possible “earnings management” to meet guidance – to understand if transactions or nonrecurring adjustments are influenced by earnings pressure that increases financial reporting risks, including risk of fraud
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Paula Loop

Paula Loop

Governance Insights Center Leader, PwC US

Stephen G. Parker

Stephen G. Parker

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Paul DeNicola

Principal, Governance Insights Center, PwC US

Barbara Berlin

Barbara Berlin

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