Suggestions to improve business reporting are plentiful. However, many are based on existing concepts of business reporting that may or may not be consistent with users' needs for information, and many that purport to be consistent are based on speculation or intuition and not on direct evidence. Accountants rarely have measured the quality of business reporting directly with users. Instead, they have developed concepts and frameworks they believe are consistent with information needs and thus usually judge ideas to improve reporting based on the degree of their alignment with existing concepts rather than on more direct verification with users.
That approach, however, carries certain risks ; the risk the reporting concepts are not closely aligned with information needs (which is particularly high during periods of rapid change, when information needs evolve and the concepts fail to keep pace) and the risk that, over time, accountants will become more tied to the concepts and lose sight of the real goal (which is to meet the information needs of users at an acceptable cost). Standard setters have tried to reduce these risks by seeking to learn directly from users about their information needs. Unfortunately, that effort has been only partially successful because highquality documentation about information needs is scarce and users have been reluctant participants in the standardsetting process.
The Committee decided that its understanding of users' information needs should be based on facts rather than merely on speculation or intuition. To get those facts, it methodically studied users' information needs to identify the types of information users believe are the most useful in valuing securities or assessing the prospect of repayment of debt securities or loans. This chapter discusses that study. The first part covers the types of users on which the study focused. The second describes the diverse projects the Committee undertook to learn about the information needs of users. Subsequent sections identify areas for further study, the Committee's analysis of the data, and the limitation of the study.
The study focused only on certain types of users ; specifically, professional investors and creditors and their advisors, which follow fundamental approaches and which cannot compel a company to produce the information needed for analysis. The study also restricted its focus to users' evaluations of only certain reporting entities ; specifically, to forprofit entities. That focus is discussed below. As used in this report, the term user refers only to the subset of users that are the focus of the Committee's study.
People use business reporting for many reasons as illustrated by the following examples: Type of User Reason for Using Business Reporting The Committee decided for two reasons to focus on improving business reporting to help users with investment and credit decisions: (1) the AICPA formed the Committee primarily to address concerns about the relevance of business reporting in making investment and credit decisions and (2) the primary focus of business reporting has been to assist users in making those decisions, thereby helping ensure that capital is allocated efficiently and effectively. The Committee decided that the traditional role served a critical function and should be preserved.
For a variety of reasons, the Committee focused on the information needs of professional users rather than nonprofessionals who use business reporting to make decisions for their personal benefit and not as part of their employment:
The Committee also considered whether to focus on the users of business reporting that advise investors and creditors, even though they are not investors or creditors themselves. The Committee concluded such advisors (which include analysts, brokers, portfolio strategists, industry consultants, and others) often serve an integral role in investors' and creditors' decisionmaking processes. Further, it noted that certain advisors, particularly analysts, are among the most important users of business reporting. Thus, the Committee decided to consider the information needs of advisors to investors and creditors, particularly analysts, to the extent their approach to developing advice requires information from business reporting.
Not all users rely on business reporting to help with their investment and credit decisions. Users' particular decision approaches in large part determine the extent to which they use information in business reporting. Some approaches require no direct information from business reporting. Examples include:
In contrast, other approaches require extensive amounts of companyspecific information of the types commonly found in business reporting. Examples include:
The Committee focused on users that follow fundamental approaches because those approaches generally require information from business reporting. Anticipation approaches have information needs that are either the same or a subset of those of the fundamental approaches. Thus, the Committee concluded that a separate study of users that follow the anticipation approach was unnecessary.
Some users can compel or negotiate for companies to deliver the information they need for analysis. Examples include investors with large ownership; users with sufficient bargaining power, such as venture capitalists; bankers when considering loans to risky credits; and rating agencies. On the other hand, other users cannot compel or negotiate for the information they need. They must rely on mandated reporting, the willingness of a company to provide information, and sources outside a company for the information needed to make decisions. Those that can compel or negotiate for such information ; such as representatives of rating agencies ; generally obtain what they need without the intervention of standard setters or regulators. Thus, the Committee concluded that it should focus on users that cannot compel or negotiate for information. However, it decided to include other users as well for two reasons:
The Committee decided to limit the scope of its work to business reporting by business enterprises and has excluded from its consideration reporting by notforprofit organizations and governmental entities. It limited its scope solely because of practical constraints on the time and resources available to complete the work. Business reporting by notforprofit organizations and governmental entities is important. The Committee hopes its recommendations related to reporting by business enterprises will assist others in recommending improvements in the reporting by notforprofit organizations and governmental entities.
The Committee designed its study to meet key objectives and to mitigate certain risks inherent in the study. More specifically, the Committee designed the study to capture information that is representative of the needs of investors and creditors generally and to distinguish between needed information and less important information.
If the information obtained from the study is biased or skewed, the risk is increased that resulting recommendations will not meet needs for information or that they will neglect important types of users. To help ensure that the information was representative, the study focused on direct input from users ; documents written by users or based on research directly with them. The Committee ignored information it considered speculative. The Committee is aware of a considerable body of research that provides important evidence about the effects of financial information and changes in that information on securities prices in capital markets.
That research includes work on the efficiency of capital markets and accounting event studies. Although useful, those research results measure behavior and do not provide sufficient knowledge about users' information needs for the Committee to use them to develop and support its recommendations. To help ensure representative results, the study used multiple projects, each of which analyzed the information needs of users from a different perspective. Findings that recurred in several projects provided a level of confidence that a single perspective would not offer. Further, the study focused on information from groups of users rather than individuals. For example, the study found a number of surveys and documents from associations, such as the Robert Morris Associates (RMA), an association representing bank loan and credit officers. The Committee also sponsored a large random survey of users, seeking confirmation of their information needs and their reactions to its tentative recommendations.
The study distinguished between the types of information that users need and the types that are interesting but not essential to their work. Users have insatiable appetites for information. Some of that information is essential to their work, other portions are helpful, and the remainder is interesting but rarely results in key decisions. Without the ability to evaluate the relative usefulness of information, resulting recommendations go too far, suggesting the need for information that does not improve the decision processes of users and thereby inflicting unnecessary costs on the reporting process.
To distinguish between needed information and nonessential information, the study used three techniques. First, the Committee developed a framework of information needs based on how investors value companies and how creditors assess the prospect of repayment. It considered information consistent with and central to the framework to be more important and other information less important. Second, the study sought data about the relative priority users place on different kinds of information, which helped the Committee rank potential improvements in business reporting. Third, the study sought data indicating the percentage of users that believe in one idea or another. Areas with the highest support suggested more important information.
The study consisted of eight projects that together provided the basis for the Committee's understanding of users' needs for information:
The Committee searched for books and articles that suggested improvements in business reporting and developed an electronic database with references to over 200 documents. Unfortunately, the initial database was disappointing. It could not provide adequate information about the information needs of users because little of the material was written by users or based on research directly with them (direct documents). The recommendations usually were based on accounting theory or intuition rather than on specified users' needs. Relatively few of the articles referred to users, and those that did usually speculated about what would be helpful to users and did not develop recommendations based on direct research. As a result, the Committee undertook a second literature search that focused on direct documents. The second search identified about twentyfive relevant direct documents.
They included, for example, a study by SRI International of users' information needs and the annual report. SRI researchers based their study on personal interviews and focus groups, followed by a large telephone survey of users. The second set of documents also included letters from the RMA Accounting Policy Committee to standard setters, regulators, and the Committee on matters involving business reporting and included a survey by Hill and Knowlton, The Annual Report: A Question of Credibility ; A Survey of Individual and Professional Investors. Although helpful, the direct documents alone did not provide a sufficient basis for understanding users' needs for information. Thus, the Committee supplemented them with additional projects that were either performed directly or sponsored by the Committee, as described below.
The Committee studied business models to identify the changes affecting the business environment and to understand the key activities that create longer term shareholder value in business enterprises. That study helped the Committee (1) develop a longer term perspective, (2) understand the types of information that would help users value companies, and (3) develop questions and information for later discussion with users. The Committee considered business models in several categories:
The Committee also studied investment models to understand how users value companies and assess the prospect of debt repayment. Those models helped the Committee understand the business valuation processes of users and provided direction and focus to recommendations about the nature of information that is useful in such processes. Those models also helped the Committee distinguish between users' needs for information and less important information. The Committee learned about those models from several sources, including Graham and Dodd's Security Analysis, by Sidney Cottle, Roger Murray, Frank Block, and Martin Leibowitz; Creating Shareholder Value, by Alfred Rappaport; Valuation: Measuring and Managing the Value of Companies, by Tom Copeland, Tim Koller, and Jack Murrin; One Up on Wall Street, by Peter Lynch; and S&P's Corporate Finance Criteria, by Standard & Poor's Corporation.
The Committee formed two groups of users for a series of formal, facetoface meetings to answer questions and cover in more depth the issues about users' information needs that had surfaced in its analysis of direct documents. It also wanted user reaction to its tentative conclusions about users' needs. The discussion groups also provided a means to meet other users for additional followup and indepth discussions. The groups included participants with diverse experiences and perspectives. The twelve members of the investor discussion group included portfolio managers and buy and sellside analysts with experience in a variety of industries.
The fifteen members of the creditor discussion group included bankers from large and small institutions, debt security analysts, analysts from rating agencies, and an analyst involved in issuing performance bonds. The Committee met with the investor discussion group on four occasions from October 1992 to March 1993 and with the creditor discussion group on three occasions from December 1992 to March 1993. Also, in April 1993, it met once with some participants from each group to discuss value information.
Each meeting lasted about four hours and followed the same format. Premeeting materials identified discussion questions and alternative responses to those questions. At the meetings, participants discussed their views on the questions and the reasons for those views. Following each meeting, the staff prepared transcripts and meeting summaries. Further, participants completed questionnaires that followed up in more depth on points raised during the meetings. The Committee's database, which is discussed below, includes both the meeting transcripts and responses to the postmeeting questionnaires.
The Committee met with two groups that represent significant numbers of users: the AIMR Financial Accounting Policy Committee and the RMA Accounting Policy Committee. The purposes of those meetings were to determine whether their views were representative of the views of a wide range of the organizations' memberships; identify additional direct documents for analysis; and provide a means to meet other users for additional followup and indepth discussions.
During the Committee's study, the AIMR committee was developing a position paper, Financial Reporting in the 1990's and Beyond, that summarized its views about external financial reporting. Major portions of the paper (which was circulated for comment, finalized, and published in 1993) are included in the database. The meeting with the AIMR committee also identified several more direct documents for consideration, including annual reports of the AIMR Corporate Information Committee, which rates the reporting practices of large public companies, portions of which also are in the database. The RMA committee and the Committee discussed several technical matters that resulted in a subsequent exchange of correspondence, portions of which are included in the database.
Committee members and staff interviewed and observed the work of certain analysts, including sellside analysts at two large brokerage and investment banking firms, and also met individually with buyside analysts from investment management firms and a sellside analyst who is well known in the European Community. Each meeting resulted in materials that summarized key points of the discussion, portions of which are included in the database.
The Committee sponsored research to identify information important to analysts as evidenced by their analytical reports on specific companies. The research team analyzed 479 sellside equity analyst reports included in a large automated database of published analysts' reports about companies. The researchers read each report, categorized each type of commentary, and used content analysis software to develop an empirical profile of the reports. The team also selected 1,000 debtrating reports from the automated database and used content analysis software to develop an empirical profile of those reports
. The profile of the reports was used to identify key words and phrases which, in turn, allowed the researchers to draw inferences about the relative importance of specific elements of business information. Those inferences helped determine what information is more important to users and, to a lesser extent, how that information is used. The research team summarized its findings and conclusions in A Content Analysis of SellSide Financial Analyst Company Reports, which is included in the database.
RESEARCH SPONSORED BY THE COMMITTEE ABOUT INFORMATION SUPPLIED VOLUNTARILY TO USERS IN ADDITION TO THAT REQUIRED IN BUSINESS REPORTS The Committee commissioned research to identify and categorize the types of information companies supply voluntarily to users in addition to the information required in business reports to infer users' information needs from that data. The researchers selected at random public companies and the Committee sought their participation in the study. Although the researchers had some difficulty in gaining access to information, particularly that not publicly available, they analyzed the data available and the report is included in the database.
The limited results of the research indicated that many public companies voluntarily supply to users the same types of information as found by the Committee's study in other projects.
A survey conducted by LH Research and directed by Louis Harris was designed to test the validity of the Committee's tentative recommendations, which were based on the projects discussed above. The report, A Survey of Investors and Creditors About Their Information Needs, which is included in the database, was useful in validating the Committee's tentative recommendations. The report also provided evidence in a small number of instances that was contrary to the tentative findings; this led, in some cases, to changes in the Committee's tentative recommendations.
The survey was conducted by telephone after pilot testing and included approximately 1,200 users. About 60 percent of the participants were involved in investment decisions and the rest represented creditors. All participants responded to certain general questions and were divided into two approximately equal groups to respond to the remaining questions.
The information resulting from the eight projects discussed above provided a reasonable basis for the Committee's conclusions about the information needs of users. Thus, the Committee relied on those conclusions in developing recommendations to improve business reporting. However, the Committee acknowledges that further study would provide important additional information to standard setters, regulators, and others charged with maintaining and improving the relevance of business reporting. The following examples illustrate the types of additional studies the Committee believes would provide useful information (studying the costs of providing information in business reporting also would be helpful, as discussed in chapter 5):
The Committee thoroughly analyzed the data from each project in the study. It first built a database of source materials about users' needs for information, which is organized by topic and includes extracts from direct documents, including transcripts from the investor and creditor discussion groups. The Committee next analyzed the material in the database topic by topic. Based on the source material, it identified leading views of users ; those supported by a majority of users with wellreasoned arguments. It also identified issues on which users are divided. The Committee summarized its analysis in a document titled Analysis of the Information Needs of Investors and Creditors, which also is included in the database. The Committee's database, described in appendix V, is available from the AICPA in both print and electronic form.
An important limitation of the study is that it focused on immediate rather than longer term information needs. Most users naturally are concerned with current practice and their current problems. Thus, they seldom offer or consider radically new ways or processes by which better decisions could be made. The Committee tried to bring a longer term perspective to its deliberations. To some degree, the study of business and investment models helped with a longer term view. In addition, the Committee sponsored a task force with the specific purpose of bringing a longer term focus to the study. To ensure a broad perspective, it included experts from various disciplines, including business strategy, management, economics, finance, accounting, and information technology ; as well as a futurist.
The task force contemplated the forces that will shape the global business environment in the longer term and the effects of those forces on the information needs of users of business reporting. The task force's report is included in the database. The accelerating pace of change today coupled with the long lead time necessary to effect improvements in business reporting require standard setters and regulators to anticipate the changing needs of users. Without a longterm perspective, business reporting will continue to react to yesterday's crises and not keep pace with the evolving information needs of users.
The Committee's study of users' information needs has been unique and important. Not only has it provided a foundation for the Committee's work, but also the Committee hopes it will influence future agendas of standard setters and regulators and the direction of their projects. Most important, the study demonstrated the worth of focusing on users ; the customers of business reporting ; as a means to identify and evaluate ways to improve business reporting. Ongoing study is key to keeping pace with evolving needs for information.