Public companies, when filing annual and quarterly financial reports, should spell out how they make money in language easy for investors to understand, the Securities and Exchange Commission’s corporate finance director said Tuesday.
The official, Alan Beller, said the commission would issue guidance to companies in the next few months about how to make improvements in the management discussion and analysis sections of their reports.
The sections, commonly known as the MD&A;, are supposed to discuss changes in companies’ financial condition and provide information about capital resources and liquidity, or how easily a company’s resources can be converted into cash.
“Even sophisticated investors need help understanding the MD&A;” in many companies’ reports, Beller said at an American Bar Assn. meeting on corporate governance.
The SEC’s guidance on writing financial reports will be part of the agency’s broader effort to crack down on companies that don’t give investors a full and accurate view of their finances, Beller said.
Instead of drafting new rules about how to write the MD&A;, the SEC plans to issue “interpretive guidance” in the next few months on the clarity demanded by existing disclosure rules, Beller said.
One improvement could be an overview at the beginning of the MD&A; “that provides a roadmap” to the content that follows, Beller said. Another change may be a fuller discussion of liquidity, he said.
Firms also may conclude on their own that the MD&A; sections must be clearer because investors are demanding more complete and more readable financial reports, Beller said.