AIMR: Analysts want better financial reports

(October 22, 2003) Public companies need to improve the quality of their financial disclosure, according to a survey of fund portfolio managers and equity analysts by the Association for Investment Management and Research (AIMR).

“Despite the fact we are in an era of increased regulation and greater scrutiny of the financial reporting that public companies provide, there is clearly room for improvement,” said AIMR senior vice-president Patricia D. Walters, CFA.

Even with intensified scrutiny in the wake of numerous corporate scandals, many analysts believe there is a higher risk of corporate manipulation of financial reports. Seventy per cent of respondents said that earnings guidance allowed for such manipulation.

“This survey provides strong evidence that financial disclosures are critical to valuation and investment decisions,” she said. “The investment community and individual investors are demanding improved quality of financial information and companies should heed this call to action.”

Despite the importance of information in their financial reports, AIMR says corporations were given an average grade of “C+” by survey respondents.

The balance sheet is the most vital piece of information, with 90% of respondents agreeing that it is “very or extremely important,” but only 44% said the quality was “good” or “excellent.” A rating of “average” was given by 41%, but 10% of analysts felt balance sheets issued by companies were of “poor” or “below average” quality.

Results were similar for annual audited financial statements, income statements and cash flow statements. Analysts assigned less importance to statements of shareholder’s equity, with only 39% saying this was important for them to formulate an opinion on a company. But they were also less satisfied with them, with only 29% giving these statements an “A” or “B” grade.

The analysts also said they found footnotes, interim financial statements, earnings releases, management’s discussion and analysis, conference calls and face-to-face meetings valuable.

These allowed them to discover information about off-balance-sheet assets or liabilities, explanations of extraordinary, unusual or non-recurring charges as well as information about pension and other retirement benefits.

While the survey was international in scope, AIMR says that the results reflected the attitudes of the Canadian industry as well.

Tell us what you think? Are corporate reports adequate, or do they need some work? How would you like to see them improved? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca