FERF & EY recently released the results of their joint Disclosure Effectiveness study, reflecting the survey input of more than 120 executives from various industries – supplemented by interviews of key stakeholders in the financial reporting process such as preparers, investors, audit committee members and legal counsel.
Key findings include:
- Almost 75% of respondents are taking action to improve their financial reporting.
- The three key focus areas are: disclosing material information and eliminating immaterial information (80%), reducing redundancies and using more cross-referencing (77%), and eliminating outdated information (70%).
- Disclosure effectiveness initiatives are predominantly driven by management teams who have questioned the clarity and readability of financial communications. However, a number of other important catalysts were cited – including SEC and FASB disclosure effectiveness initiatives.
- Areas that companies have improved the most in their 10-Ks include the MD&A, business section, risk factors, and certain footnotes to the financial statements.
- Disclosure effectiveness is a cross-functional effort. Respondents noted that it’s important to engage from the outset those involved in the company’s financial reporting process — including senior executives, controllers/financial reporting, IR, in-house and external counsel, and directors.
- Companies cited a number of key benefits to improving disclosures, including receiving favorable reactions from senior management, directors, investors and analysts who found the information easier to read and digest — allowing them to make more informed decisions. In addition to improving financial communications, companies also reported finding meaningful process efficiencies as a result of their efforts.
- Regulator and accounting standard-setter support is needed to address some of the challenges with disclosure effectiveness – most notably w/r/t the notion of materiality, which has since been the focus of two FASB proposed ASUs (see Broc’s earlier blog).
- Many companies plan to continue the process they have been using to improve disclosures, but have become wiser about potential hurdles, including, e.g., the need to start disclosure effectiveness early and get broader buy-in, especially from the IR team. In addition, companies expressed the need to engage investors – who have increasingly become more sophisticated – to better understand their needs and processes so they can deliver more transparent reports.
FASB Deliberates Next Steps on Disclosure Effectiveness Initiatives
With the December 8th comment deadline just passed, online comments to the FASB’s two proposed ASUs (here and here) aimed at clarifying the concept of “materiality” for financial disclosure purposes were relatively limited – with investor groups and corporations tending to – not surprisingly – express divergent views as to the benefits of proposals that are anticipated to reduce but enhance overall disclosure. Next steps? FASB will redeliberate its proposed changes based on stakeholder feedback received through the comment letter process.
See the comments submitted on Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material and Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information; my previous blog about this; and Public Citizen’s draft sign-on comment letter published in Jim McRitchie’s blog.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– SEC Releases Registration Statement “No-Review” Letters
– Board Oversight: Material Litigation
– Board Oversight: Capital Allocation
– Ultra Rich Investors Prefer Twitter
– Attaining “Real” Board Gender Diversity
– by Randi Val Morrison