Financial disclosures are important for many different reasons. Investors are eager to know that their investments are growing and maintaining a strong profile among analysts, creditors and other stakeholders. The most highly favored disclosures assess company performance, clarify the company's strategic direction and identify risk exposures that may affect the market. Not getting the right information often leads to inaccurate conclusions about the financial health of a corporation.
In the quest to disclose as much information as possible, the details can get a little murky. Companies can take many different perspectives and use many different formats to disclose this important information. But how much information is too much? What is the best way to disclose and communicate the needed financial information in a clear and informative way, without being overzealous or redundant?
These are the questions that many corporations are asking themselves or that investors, creditors and analysts are asking from them. EY and the Financial Executives Research Foundation surveyed corporations and found that about 75% of corporations are taking action to improve their processes for disclosures and financial reporting.
What Records Should Corporations Include in Disclosures?
Corporations are generally aware of the types of information and documents that they need to disclose. Typically, disclosures include the following:
- Annual financial reports
- Quarterly financial reports
- Proxy statements
- Earnings and release filings
The current challenge is more one of how to disclose financial reports in a meaningful way, rather than what corporations should be including. The process is becoming increasingly complex for several reasons. As a result, corporations are looking for standards and best practices to make the task easier.
No Easy Answers for Complex Processes
There's such a demand for improvement in the financial disclosure process that corporations are not the only ones looking for ways to make information easier to understand. Regulatory bodies are also doing research and asking for suggestions about how to communicate financial information in an understandable way.
One thing that is complicating the matter is that accounting requirements and governmental regulations are frequently changing.
Another matter that complicates disclosures is the popularity of mobile media. Many investors and other stakeholders want to be able to get information using social media outlets, which don't always work very well for this purpose. Social media accounts like LinkedIn and Twitter limit the number of characters or words that corporations can post. Getting financial information on their cell phones or tablets while drinking their morning coffee can quickly become a frustrating venture for investors and analysts.
Forging Ahead and Fine-Tuning the Disclosure Process
Those who need disclosure information are being pretty vocal about their complaints. Many of the disclosures they read include so much boilerplate information that stakeholders can't find the information for which they're looking. They also complain about much of the information being repetitive, which wastes their time.
Corporations are experimenting with various ways of presenting the information, including using charts, tables, bullets, graphics and infographics. Regulatory bodies and accounting boards are also looking for ways to get clear and accurate information to investors and others.
The FASB, or Financial Accounting Standards Board, is in the process of developing new disclosure guidance for inventories as part of its broader framework initiative in four main areas:
- Fair Value Measurement (Section 820-10-50)
- Defined Benefit Plans (Section 715-20-50)
- Income Taxes (Section 740-10-50)
- Inventory (Section 330-10-50)
The International Accounting Standards Board reports making some progress on improving the effectiveness of financial disclosures.
The Securities and Exchange Commission (SEC) is reaching out to companies, investors and other stakeholders asking for recommendations on how to improve the disclosure process. They are reviewing disclosure requirements in Regulations S-X and S-K as part of this ongoing process.
Audit Committees Play a Strategic Role in Updating Disclosure Processes
Change doesn't always come easy. Managers and financial reporting teams will find it easier to make changes when they have valued support from the audit committee.
To develop meaningful improvement, members of the audit committee will need to work with managers to instill a disclosure mindset within the corporation from the top down. From there, brainstorming sessions between a cross-section of leaders, including senior executives, controllers, heads of SEC reporting and investor relations, board directors, and in-house and external legal teams, are the next logical step. The company's external auditor is another resource that can provide expertise and guidance.
Audit committees should strive to help managers and others to develop timelines for implementing changes to disclosure policies. The two main areas of concentration should be on decreasing redundancy and reducing immaterial disclosures. The end product should contain clear wording and be transparent, with an overall presentation that investors and others can easily understand and disseminate.
Another important item on the disclosure effectiveness agenda is to develop ways to be innovative on social media. This development will mean finding ways to pare down information to fit the parameters of the most popular social media outlets.
Disclosure Reporting Is Evolving and Fluid
The rapid pace of changing regulatory matters and advances in reporting technology make disclosure reporting more of a marathon than a sprint. Corporations will need to work long and hard as they focus on modifying disclosure reporting practices that are currently cumbersome and complex. Efficiency is the basis for weighing mandatory regulatory disclosure requirements with their constraints on time, costs and other resources.
The Effects of Bad, Good and Better Financial Disclosure Reporting
Corporations that haven't delved too much into the area of improving their disclosure reporting practices can make a corporation's bad reputation even worse. The net result is a negative impact on the market value of the corporation and a downturn in the cost of capital.
On the flip side, corporations that are working hard to improve communications on financial disclosures will reap the benefits as they increase the confidence of their investors. It will take a cohesive team to evaluate the relevance of information in the disclosures and deliver easily understandable data. The collaborations will surely lead to improved coordination and enhanced relationships among board directors, regulators and external advisors. Most importantly, improved disclosure reporting practices will strengthen the marketplace overall.