MAKE THE MD&A MORE READABLE

By Lawrence R. Tavcar

Right now, accounting teams at countless corporations across the country are wrapping up "the back of the books" --the financial section of their companies' or clients' annual reports.

Management's discussion and analysis (MD&A) is arguably the most read and most important component of the financial section. Nevertheless, in a corporate world that sings anthems to change and continuous improvement, the MD&A stands rigid.

Investors, both professional and individual, have criticized the MD&A for years. A common complaint: Many MD&As drone on with numbers already presented in financial statements, providing little true analysis or explanation for changes in corporate performance.

When reasons are cited, they are often superficial: "Revenues increased in the Consumer Product Group largely because of higher rates of our ... brand," with no explanation for the brand's performance. The impact of cost-reduction programs or special marketing efforts often gets little attention.

The SEC has acknowledged the MD&A problem indirectly. In 1996, the SEC began a "plain English" campaign reflecting Chairman Arthur Levitt's drive to improve financial documents. In January 1997, the Office of Investor Education and Assistance issued "A Plain English Handbook" in draft form. (A date has not been set for the distribution of a final version.) While initially the SEC focused
on prospectuses, the campaign is sure
to broaden.

The SEC's handbook notes that plain English writing does not mean deleting complex information; rather, it "assures the orderly and clear presentation of complex information so that investors have the best possible chance of understanding it."

The SEC points out the most common problems with the language of disclosure documents are long sentences, passive voice, weak verbs, superfluous words, legal and financial jargon, numerous defined terms, abstract words, unnecessary details, and unreadable design and layout. It could have mentioned others, including super long paragraphs, titles that do not convey pertinent information, insufficient subheads, and few or no charts.

At too many corporations, the accountant or accounting team responsible for writing the MD&A assumes a territorial stance and invites relatively little help from people trained in writing and editing. They often believe that hype overlays the front of the book and only the back provides useful information.

Accountants should seek editorial help, if not from the corporate communications staff, then from a qualified person in another department or outside the organization. In any case, here are 15 specific suggestions to improve the MD&A:

1. Refer to the company in first person (we), as suggested by the SEC, rather than third person (the company). The annual report is the company speaking for itself; we is more personal, interactive, and logical.

2. Omit operations descriptions--except in special situations--provided elsewhere in the annual report.

3. Present most numbers in tables, not in text, and make those tables comprehensive. For example, use pertinent percentages and ratios. Focus the text on the reasons for changes. This approach can reduce text length significantly.

4. Use charts and graphs as appropriate; for example, illustrate revenues and operating income by business segment in charts.

5. Avoid lengthy sentences and overlong paragraphs. Paragraphs not exceeding eight to 12 lines of text enhance readability.

6. Use more active headlines and subheads. Rather than simple labels (Revenues, 1997 vs. 1996), some headings can be active (Earnings rose 12% as revenues increased 10%).

7. Check text carefully for overuse of passive verbs, style errors, redundancies, constantly recurring words and phrases, and weak sentence construction; for example, "compared to," is frequently used erroneously for "compared with," the correct phrase when juxtaposing numbers or other items to show similarities or differences.

8. Consolidate all comments about the coming year in one section. Federal legislation was passed to encourage forward-looking information but many companies too cautiously have backed away.

9. Review organizational styles thoroughly to determine what works best for the company.

10. Incorporate typographic devices to differentiate business segments and business units; for example, use bullet points.

11. Make certain that the information presented is truly material, changes are adequately explained, and material developments are not missed. Cite key industry data when pertinent.

12. Be sure attention given to a business unit is commensurate with its importance. Disclosure in MD&As sometimes is surprisingly uneven.

13. Be sure the typeface and size encourage readership. Type should be at least 10 points, preferably with a minimum of two points spacing (an SEC requirement in the financial notes though ignored by a surprising number of companies). Type lines should not be too long in relation to type size. Research shows that serif typefaces are more readable than the sans-serif faces.

14. Review overall presentation carefully with the design team. Use color, if available, and rules advantageously.

15. Ask to see a sample of the paper stock that will be used in the financial section. Many annual reports use color stocks that do not provide sufficient contrast to the type and therefore reduce readability.

What is the philosophy that should be adopted to guide the preparation of the MD&A? Too many companies, it appears, simply set out to meet a requirement. Writing the MD&A in a more personable style and designing the entire annual report to increase readability, can help improve shareholder relations, which is more important today with an
increasing focus on addressing customer
demands and strengthening business
relationships. *

Lawrence R. Tavcar, Tavcar &
Associates, has been involved in the production of more than 80 annual reports as a consultant, project manager, editor, and writer.