Companies are taking steps on their own to make their financial reports and disclosures more understandable, according to a new report.
The report, from the Financial Executives Research Foundation and Ernst & Young, is based on a survey of more than 120 financial executives. The study found that enhancing the effectiveness of corporate disclosures has become increasingly important because of the prevalence of compliance-driven language, increased and changing disclosure requirements, and the advent of technology, which has changed how investors consume information. The study was presented Monday at Financial Executives International’s Current Financial Reporting Issues conference in New York.
“We’ve gathered insights from some of the top leaders in finance, accounting and financial reporting across a wide range of industries,” said FEI and FERF president and CEO Andrej Suskavcevic in a statement. “Our results strongly indicate that the majority of companies are making great strides towards improving disclosure effectiveness and have seen the resulting benefits across the board.”
The study found that 74 percent of the companies surveyed are taking action to improve their financial reports. Top areas of improvement in the annual financial report (10-K) include the management discussion and analysis (MD&A) section, the business section, risk factors and certain footnotes to the financial statements, with the predominant impetus for improvement coming from senior-level executives.
Disclosure effectiveness should be a collaborative effort, according to the research. Companies that have meaningfully improved their financial reports noted the positive impact of engaging key stakeholders including senior-executives, controllers, heads of SEC reporting, investor relations, legal counsel and board members from the start.
“Enhancing the effectiveness of corporate disclosures is an area of utmost importance and has become an increased focus for companies, investors, regulators and capital markets at large,” said Neri Bukspan, a partner in EY’s Financial Accounting Advisory Services and EY Americas Disclosure Leader. “We’ve been encouraged by the steps companies are taking to improve their financial reporting evidenced in the study and hope our findings are helpful for those companies who plan to embark on that journey.”
The report found many benefits to improved disclosure effectiveness. Companies of various sizes and industries cited a number of key benefits, including positive feedback from senior management, board members, investors and analysts who found the information easier to read and digest, allowing them to make more informed decisions.
Regulator and accounting standard-setting body support can help overcome challenges, according to the report. Survey respondents indicated that additional guidance on materiality considerations would be helpful in mitigating challenges, and since the survey, regulators and standard-setters have issued proposals intended to address this area. Still, determining what to include or not to include in filings tends to be the biggest challenge faced by respondents.
Many companies plan to continue improving disclosures and have learned a number of key lessons along the way, the researchers found. Respondents said they would continue to enhance financial reporting and have learned the importance of starting early, getting broader buy-in and engaging the right stakeholders.
Survey respondents indicated that over the next two years, they plan to continue to improve financial reporting across a broad spectrum of filings and channels, including 10-Ks, 10-Qs, earnings releases, proxy statements and websites.
They offered some advice for companies looking to improve their disclosure effectiveness. Their suggestions include holding meetings with key constituents, leveraging disclosure committees, putting disclosure effectiveness on the audit committee agenda, ensuring the appropriate tone and support at the top, regular reviews of disclosure documents for effectiveness, designing executive summaries in a way that drives quality in the rest of the document and avoiding repetition.
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