Investors and financial executives are increasingly feeling overloaded by the volume and complexity of financial disclosure information in annual reports and other financial filings, according to a new study.
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The research report, by KPMG LLP and the Financial Executives Research Foundation, a nonprofit affiliate of Financial Executives International, found that the volume of disclosure information has increased 16 percent during the past six years, while the volume of footnotes has gone up 28 percent. The increased volume and complexity of financial disclosure information is causing a dilemma, especially for small investors who are trying to absorb the greater amounts of data.
The research was based on a survey sent to 6,500 financial executives, reviews of relevant academic literature and analysis of annual reports filed by 25 Fortune 100 companies across a range of industries.
“The sheer quantity of financial disclosure has become so excessive that it has diminished the overall value of these disclosures,” said KPMG audit partner Terry Iannaconi, the main author of the report.
One of the primary contributors to disclosure overload is the increased complexity of transactions, investments, financial instruments and relationships. The report found that annual reports have especially expanded in years in which a company was involved in an acquisition, restructuring, spinoff or similar event.
“Financial statement preparers have struggled to comply with the ever-increasing disclosure requirements, especially for footnote disclosures, and welcome these recommendations for reducing disclosure overload and complexity,” said FEI president and CEO Marie N. Hollein in a statement.
Ninety-two percent of the survey respondents said the complexity of accounting standards is a significant contributor to disclosure complexity. The same percentage said expanded disclosure requirements have affected financial reporting preparation and review time. In addition, 89 percent of the respondents said the volume of mandated disclosures contributes to disclosure complexity, while 73 percent admitted their company’s disclosures are influenced by concerns over future litigation.
The report included several recommendations to the Securities Exchange Commission and the Financial Accounting Standards Board to address the complexity and volume challenges: The SEC should issue an interpretive release to address the permissibility of cross-referencing and a manner of addressing immaterial items to reduce many of the redundant and unnecessary disclosures. The SEC should also move forward with its 21st Century Disclosure Project to enable greater use of technology such as XBRL to avoid unnecessary repetition of information in multiple filings, the report suggested. FASB should also accelerate consideration of the Disclosure Framework to establish a systemic approach to disclosure that properly balances disclosure considerations.
FASB and the SEC should also undertake incremental procedures to ensure that there is an appropriate and adequate cost benefit analysis in support of all new disclosure requirements, the report recommended. These procedures should include expanded field testing of disclosure proposals.