There were many times when, as an auditor of public companies, I questioned if all of my hard work was in vain . Was I being idealistic telling myself that my independent auditing would amount to greater transparency and understanding of by clients' performance by countless investors? A recent study conducted by the Journal of Accountancy found that professional and retail investors have a tendency to rely on financial information included in the MD&A portion of a company's annual report, which is reviewed but not audited by the company's independent auditors. The investors in the study, particularly retail investors, were less likely to reference the audited financial statements or footnotes when making investment decisions.
These results support something we auditors have often suspected: that the copious, detailed, and often technical financial information included in the financial statements and more specifically in the footnotes seems to be resulting in information overload. Retail investors, who generally have less financial knowledge than professional investors, can often get overwhelmed by all of this data that we CPAs have worked so hard to tick and tie down to audited information. Professional investors reference the footnotes occasionally, still preferring other sources of information on which to base their investing decisions. The SEC should consider revising their disclosure requirements to either include greater objectivity and disclosure of information in the MD&A portion of annual reports, or even require an expansion of the independent auditors' report to include such information that is the preferred source of financial information used by investors. The SEC should also review requisite footnote disclosures, perhaps eliminating redundant or less important data, and expanding more frequently referenced data such as the allowance for doubtful accounts footnote.
As auditors, we should not be discouraged, thinking that our independent audit work over our clients' financial statements and footnotes is in vain. Most of this information is the support behind the financial data included in the MD&A portion of an annual report. It would be difficult for a company to fabricate MD&A information given this close relationship. Also, with the introduction of searchable financial filings through the use of XBRL, hopefully audited data will be dissected to a greater extent by financial analysts and investment professionals to make more objective and informed investment decisions on behalf of their clients.
To read an overview of the Journal of Accountancy's study, visit http://www.journalofaccountancy.com/Web/20102682.htm#
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