The SEC is re-examining one of the most important disclosures companies provide – Management’s Discussion and Analysis, or MD&A. I’ve read lots of MD&As in my time, and to be completely candid, many of them – or at least too many of them – are poor.
There are lots of ways in which MD&As are poor, but my principal complaints are as follows:
- They don’t provide the “A” in MD&A – the analysis. Sales are up? Great! Why were they up? Well, that’s anyone’s guess. “Increased market acceptance of our product.” Also great, but does “greater acceptance” mean that more units sold? That customers were willing to pay more for each unit, so the company raised the price? That the company expanded the markets in which the product is sold? Beats me.
- Instead of discussing the “why’s,” companies do a cut and paste of key line items in their financial statements, sometimes with a “Percentage Change” column, indicating how much each line in, say, the P&L changed from period to period. In other words, they’re doing what any reader can do, which is precisely what prior SEC glosses on MD&A disclosure have said not to do. And then they copy and paste sections of the notes to financial statements about how revenue is determined. Again, no “why.”
I could rattle off a list of other weaknesses of many MD&As, but let’s move on.