Better search and visualisation capabilities, more discussion of company strategy, and ranking of risk factors would make corporate financial reporting more useful to investors, according to a report released Thursday.
Prepared with the help of a broad spectrum of experts, the report provides recommendations for improving the effectiveness of corporate disclosures. Officials with the US Securities and Exchange Commission (SEC) have been briefed on the report, which was issued through the Initiative on Rethinking Financial Disclosure and recommends actions designed to improve the content, presentation, and creation process of corporate filings.
The initiative is a partnership of the Institute for Corporate Responsibility at the George Washington University School of Business and the Center for Audit Quality (CAQ), which is affiliated with the American Institute of CPAs.
As part of the initiative, teams of graduate students from the university working with an advisory committee of academics, practitioners, and other specialists developed 11 recommendations to address the top concerns about corporate financial disclosures in the SEC-mandated 10-K annual report.
The increase in the length and, some might say, the unintelligibility of corporate financial reports has created an appetite for new rules that would promote simplicity in disclosures. A KPMG review of 25 Fortune 100 company financial reports found that the number of pages in their 10-K reports grew an average of 16% from fiscal year 2004 to fiscal year 2010.
The US Financial Accounting Standards Board (FASB) has an ongoing project designed to improve the effectiveness of disclosures in notes to financial statements and a “simplification initiative” designed to make quick, easy fixes to U.S. GAAP to reduce complexity.
The SEC has undertaken a project to consider whether the information companies are required to disclose is useful to investors and is being provided at the right time and in the right way.
The 11 recommendations of the Initiative on Rethinking Financial Disclosure are a response to SEC Chairman Mary Jo White’s call for rethinking these corporate disclosures in the 10-K annual report. They are:
- Provide search and filter capabilities. The SEC website should allow investors to adjust the presentation of information based on the devices they use, and users should have the option of viewing 10-K executive summaries that show only the changes that have occurred since the previous year’s report, according to the initiative.
- Make searches more user-friendly. Adopting certain features for 10-K searchability – including saving searches to avoid having to retrace steps later – would benefit investors, the report says.
- Provide a data visualisation platform. A new platform that allows investors to easily compare firms’ financial information historically and in the context of their industry, at investors’ discretion, would help financial statement users, the initiative says.
- Provide LinkedIn-like functionality. Establishing a social media platform for the SEC website and the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) database with functionality similar to social network LinkedIn could help users share key facts and statistics about a company, according to the report. The initiative envisions publicly listed companies managing their own profile on the platform under the regulation, governance, and control of the SEC.
- Enable approximate string matching on the EDGAR website. EDGAR searches can be frustrating and cumbersome. Search engine techniques such as the approximate string-matching function would improve the user experience, according to the initiative, the report says.
- Enhance the use of XBRL data. Several actions can be taken to expedite search time and make better use of XBRL interactive data, the report recommends.
- Include a strategic report. Adding a report that would describe the company’s objectives and strategies rather than just highlighting the results would help investors, the initiative says.
- Stratify risk factors according to non-company-specific and company-specific. Such a bifurcation would clearly and concisely stratify the risk factors without being too complicated, according to the report.
- Stratify risk factors according to impact on performance and probability of occurrence. Corporations may be sensitive to ranking risks this way. But this stratification would make the disclosures of risk factors more meaningful, the initiative says.
- Include industry-wide indicators. The SEC should impose such indicators to help investors understand a firm’s performance in the context of its industry, according to the report.
- Seek recommendations in an innovative way. A multifaceted crowdsourcing and information-gathering process would help the SEC discover the best ideas for improving the effectiveness of corporate reporting, the initiative says.
“The recommendations in this report show that the Initiative [on Rethinking Financial Disclosure] is a promising model for generating fresh perspectives,” CAQ Executive Director Cindy Fornelli said in a news release. “The students’ insights will be of value to the SEC and others contemplating disclosure effectiveness.”
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine editorial director.