Views on improving the integrity of global capital markets
04 November 2013

SEC Chair: Time for Review of Corporate Financial Reporting Disclosures

SEC Chair Mary Jo White in a recent speech addressed the importance of financial disclosures for investors. She noted that one of the most meaningful powers that the SEC has to wield on behalf of investors is requiring companies to provide investors with the information they need to make informed investment and voting decisions.

She further stressed the need for a meaningful review of corporate disclosure requirements and the opportunity afforded by the Jumpstart Our Business Startups (JOBS) Act to carry out such a review. In particular, the JOBS Act requires a review of the disclosure requirements in the SEC’s Regulation S-K.

What Is Regulation S-K and Why Is It Important?

Regulation S-K came about in response to the Great Depression of the late 1920s and early 1930s and substantially expanded reporting requirements for public companies under the U.S. Securities Act of 1933. It pertains to information contained in the annual report outside of the financial statements (such as Management’s Discussion and Analysis of Financial Condition and Results of Operations), and given its importance to investors, we agree that the SEC should comprehensively review the disclosure requirements of Regulation S-K for not only emerging growth companies but all issuers.

The recent CFA Institute report Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust, and Volume maintains that policymakers should consider disclosure reforms in the context of recent investor experiences, including the 2008 financial crisis and in light of other matters investors perceive as having an effect on the financial reporting environment.

Let’s begin with the financial crisis. For their part, investors believe the crisis plainly revealed the insufficiency of certain disclosures, especially in the case of financial institutions. As noted in a recent blog post, the disclosures that investors found most troublesome during the financial crisis were undisclosed risks, judgments and estimates, off-balance-sheet items, and going concern issues. Disclosure reform proposals, therefore, need to address these problematic areas to enhance transparency in financial reporting.

The report also highlights three key factors that policy makers need to take into account in any conversation on financial reporting and disclosure reform:

  • Technology: Investors believe we need to consider the vast changes in technology in the past 10–20 years and how technology can be effectively leveraged to provide information that investors need for decision making in a globally connected, data-driven economy.
  • Outdated accounting model: Some suggest that the existing accounting model (suited for a manufacturing economy) has not kept pace with the evolution of the business environment, now heavily based on information technology, financial services, and services generally. Absent a change in the accounting model, at a minimum disclosures should be modified to remain relevant.
  • Forward-looking information: Standard setters need to resolve the debate over the inclusion of forward-looking information (related to forward-looking measurements) inside and outside of the financial statements in favor of including forward-looking disclosures. After all, forward-looking information is the only “decision-useful” information for investors.

With this context in mind, investors believe policymakers should work to enhance the quality of financial reporting information.

CFA Institute Report: Volume of Financial Disclosures Not the Issue

SEC Chair White, however, appears to point to quantity or “information overload” — not quality — as a key source of disclosure ineffectiveness. In her recent speech to the National Association of Corporate Directors, she stated, “ever-increasing amounts of disclosure make it difficult for an investor to wade through the volume of information she receives to ferret out the information that is most relevant.”

Investors do not seek a reduction in data or volume of disclosures because they have the ability to utilize technology to evaluate the data. The findings of our report show investors don’t believe volume is an issue.

Enhancing Quality and Transparency

The CFA Institute report provides recommendations to improve overall disclosure effectiveness. There are some areas of agreement between our recommendations and White’s suggestions for enhancing disclosures.

She mentions, for example, that information pertaining to litigation issues appear in different parts of the annual report — in a section often labeled “legal proceeding,” as well as in the risk factors, in the Management Discussion and Analysis (MD&A), and in the notes to the financial statements. Often companies simply repeat the information contained in the financial statements, and we should look for ways to avoid repetition. We agree: Investors only need to be told the information once.

White also suggests considering the filing of a “core document” or “company profile” featuring information that changes infrequently. We believe that the separate filing of standing information could streamline information investors receive, allowing them to focus on matters of importance in the current reporting period as long as information is updated regularly.

We will continue to monitor these and other disclosure developments in this space.


Photo credit: Associated Press

About the Author(s)
Mohini Singh, ACA

Mohini Singh was director of financial reporting policy at CFA Institute. She represented membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

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