The Securities and Exchange Commission (SEC) along with the Financial Accounting Standards Board have launched a campaign to simplify American accounting literature by removing ambiguities that may lead investors to misinterpret financial statements made by both public and private companies.
According to Reuters the appeal is a basic one: “Please communicate in plain English. Disclose whatever will help investors understand what is happening,” Scott Taub, deputy chief accountant for the SEC requested of an audience of accountants at a conference at Baruch College in New York last week.
In one of the first steps of the simplification campaign, the FASB recently issued an Exposure Draft named “The Hierarchy of Accepted Accounting Standards.” One reason for the updating of the existing standard is to simplify the language used in accounting standards and guidance, as well as financial statements.
The primary users of financial information are the investors who need financial statements that are easy to read and understand. In preparing financial information, organizations should pay attention to balancing the use of color and white space on pages as well as using informative headings to enhance readability. Readability is a good measure by which improvements in financial understanding can be gauged.
Most word processing programs, such as Word or WordPerfect, offer features that measure readability. There are also other programs that only provide readablity scores such as Readability Plus, Dale-Chall, and Flesch-Kincaid. Most readability measures assign a grade level to the complexity of the content where the indicated grade level index corresponds to the level of education deemed necessary to understand the content.
Simple indicators use a count of the number of times the passive voice is used or reporting the average number of words in a sentence or even sentences in a paragraph. More complex indicators account for the number of complex words with three or more syllables and the total number of words. One item that readability measures do not consider is the use of charts or photos to enhance technical comprehension but the public audience is ultimately the yardstick to measure these efforts.
Financial statements intended for public distribution should be clearly readable, informative, and useable. Specific terms should be simplified or explained. Acronyms that may be commonplace to industry insiders should be spelled out. In addition, Taub told Reuters that the SEC is working on ways to help companies determine whether certain types of information are material or not. Such guidance would help eliminate information gaps and insure that all information that was provided was relevant to readers’ needs.