Strategy

Results Are In: Disclosure Effectiveness Study Findings Revealed and May Be Surprise to Some


by FEI Daily Staff

FERF and EY released a report today titled, Disclosure Effectiveness: Companies embrace the call to action, which shines important light on the actions companies have taken in their journey to improve the effectiveness of their disclosures.

The report outlines the challenges companies are facing, the benefits reaped and key lessons learned along the way. It highlights what executives are thinking about tackling next and offers a blueprint for companies beginning their own disclosure improvement initiatives.

Over the past several months, FERF and EY surveyed more than 120 executives from various industries. We supplemented the study with interviews with investors, board members and various other key stakeholders.

Our report reveals some key findings including:

  • Approximately three quarters (74%) of respondents are taking action to improve their financial reporting.
  • Disclosure effectiveness initiatives are predominantly driven by management teams who have questioned the clarity and readability of financial communications. This issue was particularly visible when senior-level executives were relatively new to the roles. However, a number of other important catalysts were cited, including the initiatives underway at the SEC and FASB.
  • Areas that companies have improved the most in their annual reports (Form 10-K) include the management discussion and analysis (MD&A), the business section, risk factors and certain footnotes to the financial statements.
  • The three key focus areas in companies’ improvement efforts centered on disclosing material information and eliminating immaterial information (80%), reducing redundancies and using more cross-referencing (77%), and eliminating outdated information (70%).
  • Disclosure effectiveness is a cross-functional journey together. Companies that have made meaningful improvements to their financial reports highlighted that it’s important to engage those involved in the company’s financial reporting process — including senior-executives, controllers, heads of SEC reporting, investor relations, in-house and external counsel, and board members — right from the start.
  • Companies cited a number of key benefits to improving disclosures, including receiving favorable reactions from senior management, board members, investors and analysts who found the information easier to read and digest — allowing them to make more informed decisions. In addition to improving financial communication, companies also reported finding meaningful process efficiencies as a result of their efforts.
  • Regulator and accounting standard-setter support is needed to address some of the challenges with disclosure effectiveness. Materiality continues to be a primary challenge. (During our study, the FASB has distributed two proposed ASUs for public comment – please read FEI Daily Disclosure Effectiveness Deadlines Loom for more information on these drafts.)
  • Many companies plan to continue the process they have been using to improve disclosures, but have become wiser about potential hurdles, which our outlined in the report. Still more changes are on the horizon across a broad spectrum of platforms, with a continued focus on MD&A and notes to financial statements.
To access the full report please click here or visit www.ferf.org/reports.