Question

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal.

Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

1. Why are corporations concerned about presenting profit forecasts?

Short answer

Corporations are concerned about profit forecasting because it will fully enlighten not only investors but also competitors.

Step-by-step solution

Meaning of Profit forecasting

Profit forecasting is the process through which managers or analysts calculate a company's probable future profit over a given period of time. It enables to make data-driven decisions and establish data-driven initiatives.

Explaining the corporation concerned about presenting profit forecasts

The following are some of an organization's worries regarding forecasting:

1. No one can predict what will happen in the future. As a result, projections will always be erroneous, even if they give the sense of being precise about the future.
2. Companies will only endeavor to achieve their reported projections, not to generate results that are in the best interests of investors.
3. There will be recriminations and maybe legal action if projections are not shown to be correct. Even if a safe harbor law is in place, businesses are concerned since the term "reasonable" is subjective.
4. Forecast disclosure will harm businesses since it will completely inform not just investors, but also rivals (foreign and domestic).