Financial Reporting Disclosure Reform: Need for Investor Input
Currently there are initiatives underway to create an overarching framework to improve financial statement disclosures. The “disclosure framework” is intended to help enable companies communicate more effectively with investors, eliminate redundancy, and move away from what some assert has become a compliance exercise.
In July 2012 accounting standard setters issued two documents seeking public comment on the development of a disclosure framework:
- The Financial Accounting Standards Board’s invitation to comment on its discussion paper, Disclosure Framework
- A discussion paper, Towards a Disclosure Framework for the Notes, by the European Financial Reporting Advisory Group, French Autorité des Normes Comptables, and U.K. Financial Reporting Council
Both consider how a disclosure framework could change the way in which disclosure requirements are set by standard setters and how companies may apply these requirements in their financial statements. These documents seem focused on writing more principles-based standards aimed at reducing the quantity of disclosures while leaving it up to management to decide what to disclose.
While preparers of financial statements, accounting firms, academics, and others have commented, there has been little input from the investment community. The message, primarily from the preparer community, is that disclosures have become voluminous and burdensome for users to read. They believe that excessive disclosure volume may obscure key messages and cause investors to overlook the most relevant pieces of information amongst all the clutter contained in the financial statements. They, therefore, argue that reducing the quantity of disclosures would make them more effective.
However, investors have a very different perspective. According to a 2012 CFA Institute member survey, a significant majority of respondents (80%) said they do not believe that the volume of disclosures is an area of investor concern. The message is clear: Investors are not seeking a reduction in disclosure volume.
Thus, a dialogue with investors is essential. They are the main consumers of financial statements, and disclosure reform should be aimed at ensuring investors receive useful information to guide their investment decisions.
We believe the current, highly theoretical discussion has led to the lack of investor engagement on this important issue because it is difficult for investors to see what a disclosure framework might look like or assess the tangible effects other than achieving the preparer mandate to reduce disclosures. To more effectively engage financial statement users, standard setters and policy makers need to focus on tangible reforms that illustrate the impact the disclosure framework will have upon the information investors receive for their financial analysis.
Investors believe that the 2008 financial crisis and recent corporate scandals have starkly demonstrated a lack of transparency in financial reporting information — evidenced by the failures of entities such as Lehman Brothers, MF Global, and Bear Stearns and the enormous losses, bailouts, or acquisitions of Morgan Stanley, AIG, Countrywide, and Merrill Lynch. Our survey reveals that investors (96% of respondents) are calling for enhancements in the quality and effectiveness of financial reporting information aimed at increasing transparency. Standard setters need to engage investors to ascertain how they believe greater transparency can best be achieved.
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