Financial Reports Don?t Meet SEC Standards

Researchers at the University of Arkansas have found that less than 17 percent of financial reports meet Securities and Exchange Commission regulations aimed at keeping shareholders informed.

“We doubt that the managers in these firms would tolerate receiving reports that are as vague and unclear as they provide to investors,” said Rod Smith, assistant professor of accounting in the UA’s Walton College of Business.

The study was conducted by Smith, Carolyn Callahan, UA professor and Doris M. Cook, chair in accounting, and Amanda McNeely, a student working on her doctorate in business.

The researchers analyzed annual reports filed with the SEC between 1994 and 2001 from the largest companies in four industries: banking, electronics manufacturing, airlines and pharmaceuticals. The study included 71 companies with market values ranging from $8 million to more than $344 million.

The SEC requires qualitative discussion and analysis in financial statements. Smith said that means discussion should be forward-looking and clearly communicate the company’s strategy, success factors, competitive environment and future projects.

“In general, we did not find that the firms clearly convey adequate information to allow investors to assess future prospects,” Smith said. “Most of management’s discussion is historical in perspective, and the future-oriented items are generally vague and difficult to assess from the investor’s viewpoint.”