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PwC: Investors: Management Commentary barely sufficient

09/06/2011 16:05
The usefulness of written management commentary is rated low by analysts and investors. The average Management Discussion and Analysis (MD&A, or Operating and Financial Review in the UK) barely rates 6 out of 10.

This is shown by a newly-released study by PwC and Rotterdam School of Management, Erasmus University (RSM) of over 400 analysts and investors worldwide. The information provided in the MD&A lags behind the expectations of analysts in many areas. Analysts and investors are in favour of more mandatory disclosures and often miss relevant disclosures about, for example, sustainability, productive capacity, and legal structure.

The MD&A provides a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. The MD&A is normally published together with the primary financial statements and notes.

Six out of ten analysts and investors are in favour of more mandatory information in the MD&A. A majority says information about sustainability, productive capacity, and legal structure is in short supply in the MD&A. Just a few are satisfied by the information that is provided on strategy, financing, and risks.

The MD&A could also improve if more information was quantified and presented more clearly and consistently. Tables speak louder than words, is what most appear to believe.

The more important findings of the research:

• The usefulness of written management commentary is rated 6 on a scale of 1 to 10
• Management commentary is generally preferred to be received in a conference call
• 59% of respondents are in favour of more mandatory disclosures in the MD&A
• 63% of respondents want more quantitative information
• 57% of respondents want more consistent presentation
• The best information is provided on accounting policy changes. About 30% are largely or completely satisfied about those types of disclosures
• 46% believe that the MD&A is audited

The researchers asked analysts and investors to rate the usefulness of different types of information, such as primary financial statements and earnings press releases, on a scale of 1 to 10. The MD&A scored remarkably low: 6 out of 10. The disclosures that are provided in the MD&A lag behind the information needs of analysts and investors in many areas. Only few investors indicate to receive information that largely or completely satisfies their needs for sustainability (17%), legal structure (21%), and productive capacity (19%). A small number of analysts and investors receive sufficient information about financing (22%), strategy (25%) and risks (22%). The best information is provided with respect to changes in accounting policies. Auditors are often involved in developing these disclosures.

Mandatory disclosures

Six out of ten analysts and investors indicate that the MD&A would improve if more mandatory disclosures would be required. The research leader, Dr. Erik Roelofsen, who is a researcher at RSM and director at PwC: “Recently the International Accounting Standards Board issued new rules for management commentary. These rules are non-binding. When it issued the new rules, the board expected that the existence of these rules would encourage jurisdictions to adopt it as their own. To date we have seen few jurisdictions that have taken meaningful steps in this direction, while analysts and investors would clearly applaud it.”

Most countries only have limited requirements with respect to the content of the MD&A. This study shows that more specific guidance with respect to the content of the MD&A are desirable. Roelofsen: “Instead of each and every country starting to develop its own requirements for the MD&A, it would be easier and better for international comparability and convergence if local jurisdictions would adopt the guidance developed by the IASB as their own. In Europe, I could also see a role for the EU in this respect.”

More numbers

Another way in which the MD&A could be improved, does not relate to the content but to the presentation. Investors want more consistency in the presentation format. Roelofsen: ‘’Many firms use long narrative disclosures and always changing presentation formats in their MD&A. This makes it difficult for analysts to find the information they need.” Further, words like “significantly” or “as expected” meet with the annoyance of analysts, according to Roelofsen. “Analysts prefer a number in a table and that table should preferably look the same year-on-year.” Another remarkable result of the study is that 46% of analysts and investors presume that the MD&A is audited, whereas that rarely is the case in practice.

The full research report can be found on