Creating clear financial statement disclosures is not always easy. Creating (unintentional) confusion? Well, that’s another matter.
Let’s pretend that Olympic judges rate your most recent disclosures, flashing scores to a worldwide audience. What do you see? Tens everywhere—or something else?
Balance sheets tend to be clear. Why? The accounting equation. Assets always equal liabilities plus equity. But there is no disclosure equation (darn it), and without such, we flounder in our communication.
CPAs tend to be linear thinkers. We enjoy Pascal more than Hemingway, numbers more than words, debits and credits more than paragraphs. Our brains are wired that way.
But accounting is more than just numbers. It is the communication of financial statements and disclosures. In the name of clear disclosures, I offer these suggestions.
Who will read the financial statements? Owners, lenders, and possibly vendors. Owners—especially those of smaller businesses—may need simpler language. Some CPAs write notes as if CPAs (alone) will read them. While accounting is technical, we need—as much as possible—to simplify.
Lengthy paragraphs choke the reader. Breaking long paragraphs into shorter ones makes the print accessible.
Less is more in many instances. When we try to say too much, we sometimes say…too much. Additionally, short sentences are helpful.
CPAs may have invented the run-on sentence. As I read one of those beauties, I feel as though I can’t breathe. And by the end, I’m gasping. Breaking long sentences into shorter ones makes the reader more comfortable. And she will thank you.
CPAs don’t receive merit badges for long, complicated words. Our goal is to communicate, not to impress. For example, split is better than bifurcate.
Attorneys are not our model. I sometimes see notes that are regurgitations of legal agreements, copied word for word—and you can feel the stiltedness. Do your reader a favor and translate the legalese into digestible—and might I say more enjoyable—language.
Long sentences with several numbers can be confusing. Tables are easier to understand.
Too many CPAs copy disclosures from the Internet without understanding the language. Make sure the language is appropriate for your company.
Think of each disclosure header as a bucket. For example, if the notes include a related party note, then that’s where the related party information goes. If the debt note includes a related party disclosure (and this may be necessary), place a reference in the related party note to the debt disclosure. You don’t want your reader to think all of the related party disclosures are in one place (the related party note) when they are not. The same issue arises with subsequent event notes.
When writing, we sometimes think we are clear when we are not. Have a second person review the note for proper punctuation, spelling, structure, and clarity. If you don’t have a second person available, perform a cold review the next day—you will almost always see necessary revisions. I find that reading out loud helps me to assess clarity.
I also use Grammarly to edit documents. The software provides grammar feedback as you write. If you don’t have a second person to review your financials, I recommend it.
Vetting your notes with a disclosure checklist may be the most tedious and necessary step. FASB and GASB continue to issue new statements at a rapid rate, so using a checklist is necessary to ensure completeness.
I hope these suggestions help you win gold–10s everywhere. I think I hear the national anthem.
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.