Birds don't do it, bees don't do it and, while there is little evidence of educated fleas doing it, Hong Kong companies should most certainly start. Issuing profit warnings, that is. On April 10, Varitronix International, which makes liquid-crystal displays, plunged 14.81 per cent following the release of a profit warning on last year's earnings. However, the company won applause from market watchers for its decision to issue the warning. The issue of profit warnings is a seemingly innocuous one - a company arrives at the conclusion that forecasts are not going to be met ahead of its results announcement and quickly informs the marketplace. All investors are then in a position to decide if they should dump or hold the stock. Of course, the bad news will eventually be released in the results announcement anyway and, as we have seen from the recent earnings season in Hong Kong, punters can make their investment decision on the day. However, if a company comes out and surprises the market with lousy numbers, it raises a series of questions. How long has the company known that its numbers would not meet the market's expectations? Just who in the company was aware of this? How have these people acted on this information? Who else have they told and how have they acted on the information? These pitfalls beg the question as to why - with more than 1,000 companies listed on Hong Kong's main board - only three instances spring to mind in the past year in which companies issued earnings warnings - China Everbright, Johnson Electric Holdings and Varitronix. 'Varitronix did the right thing by making that warning,' said David Webb, the editor of Webb-site.com. 'Generally speaking, the disclosure of current trading conditions and best estimates are a good thing for investors rather than having shocks to the market.' So why did Varitronix issue a profit warning where countless other companies chose not to? Chief accountant Fred Tort said: 'Because there are guidelines issued by the stock exchange saying that if a matter happens that will substantially affect the price, the directors should make an announcement.' Under the terms of the listing agreement, the exchange said companies had to inform shareholders if 'to the knowledge of the directors there is such a change in the issuer's financial condition, or in the performance of its business, or in the issuer's expectation of its performance that knowledge of the change is likely to lead to substantial movement in the price of its listed securities'. In case that did not spell it out clearly enough, or in case Hong Kong directors are a forgetful bunch, the exchange released a guidebook earlier this year spelling out exactly what it considers a profit-warning situation. 'Where an issuer becomes aware that its results may be significantly worse than generally accepted market expectation, the issuer should publish an announcement warning investors of the likely impact,' it said. Of course, there is a certain amount of woolliness in the language - most obviously, who is to decide what 'significantly worse' is? It could be 5 per cent, it could be 50 per cent. Varitronix saw that its annual results were going to be 'significantly and adversely affected' by excess inventory provisions and write-offs and made the decision to tell the market - the whole market - about it. Hong Kong shareholders deserve more respect from the companies they fund.