Investors Differ from Standard-Setters on Accounting Disclosures

Investors are more concerned about improving the quality of financial disclosures rather than simply reducing the quantity of them, according to a new report from the CFA Institute, which takes aim at some recently proposed disclosure reforms that seek to cut down disclosure overload.

Both the Financial Accounting Standards Board and the International Accounting Standards Board have been working in recent years on ways to reduce boilerplate disclosures in financial reports that provide little real information (see Accounting Boards Work to Cut Disclosure Overload). But the new report from the CFA Institute suggests that many sophisticated investors and financial analysts already have the tools at hand to wade through the obfuscating language, but still want the information in the disclosures, but they want it made more prominent and presented more clearly.

The report, “Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust and Volume,” includes investor views on disclosure reform priorities as well as recommendations to enhance overall financial reporting and disclosure effectiveness.

“To determine what investors believe standard setters should focus their efforts on to enhance financial reporting, we asked members to prioritize a variety of potential financial reporting initiatives,” wrote one of the study’s authors, Mohini Singh, director of financial reporting policy at the CFA Institute, in a blog post. “This revealed that what investors believe is important (emphasizing matters of importance during a reporting period and improved financial statement presentation) is diametrically opposed to where standard setters are currently focusing their efforts (developing a disclosure framework aimed at reducing the quantity of disclosures). Standard setters should, therefore, refocus their efforts to enhancing quality and transparency in the areas that investors see of greatest importance.”

The CFA Institute recommends that, based on its outreach to investors, instead of simply focusing on reducing disclosure overload, accounting standard-setters should concentrate on improving financial statement presentation and transparency. “Disclosures are less effective when the underlying financial statements are not effective or when disclosures are meant to compensate for poor presentation,” Singh pointed out.

Financial statement preparers should also focus more on making the information more digestible and better communicating a company’s financial results.

The CFA Institute acknowledged that the most challenging aspect of effective financial disclosures comes in communicating the judgments and estimates that were made in preparing the financial statements, providing a clear and complete picture of economic assets and obligations not included in the financial statements, and conveying the risks associated with a business.

“The 2008 financial crisis highlighted these as the most troublesome disclosures for investors,” said Singh. “We underscore the importance of improving disclosures in these areas. And when necessary, preparers and auditors should go beyond required disclosures to provide investors with a complete understanding of the underlying economic effects of transactions and account balances.”

The CFA Institute report also discusses other ways that standard setters will need to consider to improve disclosures, such as materiality, technology, cost-benefit analysis, and underlying behavioral elements. Singh noted that while investors support developing a disclosure framework, the majority of the CFA Institute’s survey respondents believe other financial reporting reforms are of greater priority. “Adopting these recommendations would lead to substantial progress in financial reporting, creating less of a need for a disclosure framework,” she wrote.