Overload of Financial Disclosure Rules Is Defeating the Purpose of the Exercise
Groves, Ray J., American Banker
America's banking institutions, like the rest of corporate America, are subjected to excessive disclosure requirements -- and recent developments in areas such as derivatives threaten to add to that information overload.
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.
To help 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, BankAmerica, 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 Financial Accounting Standards Board was formed.
We measured disclosures in three ways:
* Number of total pages in the annual report.
* Number of pages of footnotes.
* Number of pages of management's discussion and analysis.
We separately surveyed the annual reports of 12 of the nation's largest banks. Six of the 12 banks in the survey were also included in the survey of 25 companies referred to above.
Banks are particularly hard hit by disclosure requirements -- and our projections show banks' disclosure burden being even greater in the years ahead.
The issue of excessive disclosure is particularly timely and significant within the banking industry. For example, derivatives are under intense scrutiny by the media, various government agencies, standard setters, and the business community itself. While derivatives have proved to be effective tools for managing risk, if used inappropriately they can result in levels of risk that are unacceptable for an organization. Consequently, many new disclosure requirements are being sought by the Securities and Exchange Commission and regulators.
For example, the SEC has indicated that it wants disclosures that go beyond FASB's recent statement on derivatives. While it's not certain just what the SEC's stance will encompass, some prior comments are cause for concern. In November of last year, SEC chief accountant Walter Schuetze made a speech to a banking conference and set forth the disclosures he believes banks should provide for off-balance-sheet derivatives.
Among his items: notional amounts, strike prices, interest rates, due dates, the amounts of cash that will flow in and out depending on where interest rates go, when cash receipts will come in, when cash payments will go out.
Also: activity in contracts; unrealized gains and losses or replacement value of contracts; deferred gains and losses; when, period by period, deferred gains, and losses will be recognized in income, and the amounts thereof; the effect of those instruments on net interest income or margins; why the company is entering into such contracts; whether it will enter into such contracts in the future; what the bank is doing to prevent counterparty credit loss; and the effects of netting agreements, including disclsoure about their legal enforceability. …