In recent months, much attention has been paid to plans by the Securities and Exchange Commission to rethink its disclosure regime and simplify what has become, really, a mess that confuses and overloads investors.

Financial Executives International’s annual financial reporting conference, held in New York City last week, was no exception. Various speakers from the SEC assured the audience that disclosure reform is well underway and they can expect big news in 2016. Others, however, stressed that while we all wait for that to happen, companies can try disclosure reform themselves.

“A significant number of companies are voluntarily taking the initiative to make their footnotes more concise, and easier to understand, and to focus on the more important issues about their companies,” Marie Gallagher, senior vice president and controller of PepsiCo, said at the conference.

That view is supported by a new survey of 120 company financial executives conducted by EY and the Financial Executives Research Foundation. Nearly three-quarters of the companies surveyed said they are already taking steps to rethink their financial reports. Improvement areas to the Form 10-K annual financial report include Management Discussion and Analysis, the business section, risk factors, and footnotes to the financial statements. Throughout the next two years, many plan to continue to improve financial reporting in 10-Ks, 10-Qs, earnings releases, proxy statements, and corporate websites.

“Disclosure effectiveness may have been discussed many times before, but this time it feels different,” says Neri Bukspan, a financial accounting advisory services partner at EY. “It is almost a grassroots movement, where CFOs and other executives are looking at their disclosures and realizing they are not what they want to share with investors. Rather than waiting for the regulators to tell them what to do, they are taking it upon themselves to improve them.”

American Express is among the companies not waiting for the SEC’s disclosure review. “There are key things we focused on,” says Deputy Comptroller David Cornish. “The first was eliminating redundancy in footnotes and the Management Discussion and Analysis. If we say it once, we only say it once. If we need to bring [data] to another spot, we use internal cross references so we are not saying the same things two or three times within a document.”

The process also involves a review of what information is underserved in the current format. “One of the areas where we didn’t have a lot of disclosure was talking about specific legal claims and actions that we had ongoing,” Cornish explains, adding that these matters typically populated ballooning footnotes. Upon further review, his team determined that because there was already a full legal section, “it would be redundant to put some of that information, redact it, and put it in the footnotes.” The choice was made to move them back into the MD&A.

“Be aggressive,” says AmEx Deputy Comptroller David Cornish. “Go big and if you don’t get everything, get most of what you are trying to accomplish with the process.”
David Cornish, Deputy Controller, Deputy Comptroller, AmEx

General Electric has earned a reputation for innovation when it comes to its financial reporting, with recent efforts to purge redundancies and add visuals. Jan Hauser, controller and chief accounting officer, described the impetus for the significant overhaul of its Form 10-K. The company changed its proxy disclosure document in 2013, redesigning it with pictures and graphs. “The reaction we received was overwhelming,” she says. That success, and the involvement of internal securities counsel throughout the process, built momentum to take a similar approach with other disclosures.

Enter a new chief financial officer, Jeff Bornstein, who arrived later in 2013. “His first time though the 2013 10-K, when it was still in its older form, was to be incredulous as to how dense it was,” Hauser says. His reaction: “How can our shareholders or readers understand any of this? We have to rethink it.”

An initial step was moving beyond GE’s traditional, rigid template of how various disclosure requirements were ordered.

“Do we actually have to follow that or can we actually tell a story? When you start telling a story then you see where the redundancies are and can start to eliminate disclosures,” Hauser says. “We learned that we didn’t actually need to take any information away because we reduced the word count and eliminated redundancies. We were actually able to add information as we changed the flow of the document. It really wasn’t a process of eliminating certain disclosures; it was presenting something that was much more readable.”

With charts, graphs, and an eye toward developing a company narrative, GE was able to do a better job explaining the connections among business segments. Investors benefitted from clearer descriptions of goals, global growth operations, research centers, and leadership development, Hauser says.


The following charts, from “Disclosure Effectiveness: Companies Embrace the Call to Action,” a study by EY and the Financial Executives Research Foundation looks at  areas that companies are focusing on as part of an internal disclosure review and the documents they say were most improved throughout the effort.
Areas of Focus

Documents that were improved as part of initiatives

Source: EY/Financial Executives Research Foundation.

“We talked more about how we managed risks in the front part of the document and showed where those reporting lines went in a pictorial way,” she adds. “We added the front section, a summary that was not a required section but attempted to demystify what GE is, what it does, and how we do it.”

Proof of the initiative’s success came when segment CEOs—perhaps paying added attention to the 10-K because it now featured their headshots—started to complain. “You can’t disclose this piece of information,” they would tell Hauser. “In fact we had been disclosing it for years, but you could ever really see it because it was buried in deep text.”

Making an Overhaul Happen

Those who have gone through the process cite the need for a collaborative effort, one that includes both internal stakeholders—senior-executives, controllers, heads of SEC reporting, investor relations, legal counsel and board members from the start—and external regulators and standard setters.

Internally, the process didn’t require a hard sell, but it did require the review and assistance of a broad coalition that included the disclosure committee, general counsel, investor relations, and the audit committee. “One of the potential pitfalls is not being inclusive throughout the whole process with relevant stakeholders,” Cornish says. “Nobody likes surprises.” While he didn’t seek preapproval from the SEC for specific changes, they were apprised of the process from start to finish. After reducing a four-page footnote down to two paragraphs, not a single question was asked during a subsequent SEC review of the financial statements.

Among the suggestions as companies begin their homegrown disclosure review: hold meetings with key constituents; leverage disclosure committees; put disclosure effectiveness on the audit committee agenda; conduct regular reviews of disclosure documents for effectiveness; and design executive summaries in a way that drives quality in the rest of the document.

Also, start the review process early and don’t rush it. “You are going to go through a lot of iterations,” Hauser says. “What looks easy is not that easy. You are going from prose to charts, and everything that has to happen is no small feat. Start early and make sure you have senior leadership involvement, because that is going to get you over the hump.”

“This is an evolution that has gone on over time,” Cornish says. “There is not a beginning or an end point; it is an ongoing process. We are always challenging ourselves. Be aggressive. Go big and if you don’t get everything, get most of what you are trying to accomplish with the process.”