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Dec 04

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Torturing ourselves with repetition and complexity in accounting disclosure

Accounting firm KPMG and the Financial Executives Institute sponsored a study of the complexity in U.S. financial reporting. Entitled aptly “Disclosure Overload and Complexity: Hidden in Plain Sight”, the report found that there was ample reason for changes in accounting disclosures. This is hardly a revelation to anyone involved with either preparing this information or using this information for financial analysis. Nevertheless, a formal study is useful because those who are creating the numerous requirements want rigorous study to justify any movement from the status quo.

Some of the increase in disclosure is not additional complexity, but is instead both mindless repetition of existing information that the SEC is mandating, and description of information that is so basic that it is already understood (with even being mentioned) by anyone with even the most rudimentary knowledge of business or accounting. The report provided multiple examples of silly disclosures made by some of the largest public companies in the U.S.

Based on the research results, the report made the following eight recommendations to address the disclosure complexity and volume challenges.

  1. The SEC should issue an interpretive release to address the permissibility of cross-referencing and manner of addressing immaterial items to reduce redundant and unnecessary disclosures.
  2. Summaries of significant accounting policies and discussions of newly implemented or soon to be implemented accounting policies should be streamlined to eliminate unnecessary redundancy and patently immaterial disclosures.
  3. Preparers should expand their use of tabular and graphic information delivery formats.
  4. The SEC should move forward with its 21st Century Disclosure Project to enable greater use of technology to avoid unnecessary repetition of information in multiple filings.
  5. The FASB should accelerate consideration of the Disclosure Framework to establish a systemic approach to disclosure that properly balances disclosure considerations.
  6. Preparers should confine disclosure of risk factors to company specific unique risk factors as contemplated by Item 503(c) of Regulation S-K.
  7. Accounting standards that mandate disclosure in interim period financial statements should include provisions similar to that found in Regulation S-X that specifically permits omission of disclosure where there has been no significant change in the item since the date of the latest annual financial statements.
  8. The FASB and SEC should undertake incremental procedures to ensure that there is an appropriate and adequate cost/benefit analysis in support of all new disclosure requirements. This should include expanded field testing of disclosure proposals.”

Additional detail regarding the study’s findings and rationale are in this article.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2011/12/torturing-ourselves-with-repetition-and-complexity-in-accounting-disclosure/

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