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Can Anyone Read Accounting Footnotes Well Enough to Understand Them?

Author

Listed:
  • Kelly Wilkinson
  • Alan B. Czyzewski

Abstract

Increasingly, people are asked to make investment decisions that affect their retirement. In the past, “experts†in the federal government, pension plans, and/or other money management entities made these decisions. The “expert†investor’s skill set includes the ability to read and understand financial material. While there are many sources of financial information newspapers, mutual fund reports, annual reports and others, the purpose of this study is to determine the reading level of footnotes in financial statements. FASB has issued a Discussion Paper concerning footnote effectiveness ( FASB, 2012) supporting the importance of the clarity of the footnotes. 100 firms’ footnotes were analyzed using Word (from Office 2003 suite) spelling and grammar check. The average Flesch Index reading level of the footnotes was 20.4.This score indicates it is very difficult to read the footnotes. In fact based on the average reading level of adults, a large portion of the U.S. population are unable to understand footnotes.Â

Suggested Citation

  • Kelly Wilkinson & Alan B. Czyzewski, 2015. "Can Anyone Read Accounting Footnotes Well Enough to Understand Them?," Accounting and Finance Research, Sciedu Press, vol. 4(2), pages 123-123, May.
    • Handle: RePEc:jfr:afr111:v:4:y:2015:i:2:p:123
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    References listed on IDEAS

    as
    1. Tim Loughran & Bill Mcdonald, 2014. "Measuring Readability in Financial Disclosures," Journal of Finance, American Finance Association, vol. 69(4), pages 1643-1671, August.
    2. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    3. Tim Loughran & Bill McDonald, 2014. "Regulation and financial disclosure: The impact of plain English," Journal of Regulatory Economics, Springer, vol. 45(1), pages 94-113, February.
    4. Tim Loughran & Bill Mcdonald, 2011. "When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks," Journal of Finance, American Finance Association, vol. 66(1), pages 35-65, February.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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