Financial disclosure: when more is not better.

• Author: Groves, Ray J.
• Position: Viewpoint

Full and fair financial statement disclosures are a major reason why the United States' capital markets are the best in the world -- and why they have the most credibility and integrity. However, our present financial disclosure system doesn't attempt to distinguish between truly decision-critical information and what might be described as non-essential, compliance and routine data. For many years we've been following an incremental approach to financial reporting that produces a package of financial statement disclosures that by definition is always guaranteed to be more. Unfortunately, the aggregate result isn't better.

In our ever more complex business environment, the sheer quantity of financial disclosures has become so excessive that we've diminished the overall value of these disclosures. Users are overwhelmed. They can't find or can't recognize -- in a reasonable amount of time -- those disclosures that should have an impact on their credit or investment decisions. And our out-of-control litigation environment contributes to the problem. Moreover, the problem shows no signs of abating. In fact, all signs indicate it will get worse.

Each new FASB, SEC and AICPA financial disclosure requirement is a stand-alone document. No one considers the sum of all the financial disclosures. Instead, the organizations focus narrowly on the subject of the new requirement. So the amount of total disclosures is forever increasing.

What's the answer? These organizations should step back and systematically consider the totality of the disclosure system. We need an approach to determine what disclosures are truly needed, not just what's available or nice to add.

THE PAPER GLUT OF 2012

To quantify excessive disclosure, we made a non-scientific survey of the 1972, 1982 and 1992 annual reports of 25 large, well-known companies, including AT&T, Bank of America, Coca-Cola, General Electric, General Motors, IBM, Mobil, J.P. Morgan and Xerox. We started with 1972 because two decades of change seemed like a reasonable period to make some measurements and to provide the basis for extrapolation into the future. Also, 1972 is the year before the FASB was formed.

We measured disclosures in three ways: the number of total pages in the annual report, the number of pages of footnotes and the number of pages of management's discussion & analysis, or the MD&A. Our survey findings certainly illustrate the information overload caused by excessive disclosure. The power of compounding at relatively modest growth rates over 20 years results in very large cumulative increases.

Do all users really need all these pages of information? For business segment disclosures, it's very useful to disclose the income contributions by segment, but is it necessary to also disclose the amount of depreciation for each segment?

Consider the disclosure requirements under FAS 109, Accounting for Income Taxes. While a reader would likely want to know the amount of total and deferred income tax expense, are credit and investment decisions influenced by the individual tax effect of five or 10 temporary differences for three years?

Or take the required pension and OPEB (other postretirement benefit) disclosures. Do readers need or want all of these excruciating details? In 1992, GM provided two entire pages of pension and OPEB disclosures in its annual report. That same year, IBM disclosed a combined total of 3.5 pages of pension and OPEB information. Does it make a difference to the average reader to know the amount of the...