Can Anyone Read Accounting Footnotes Well Enough to Understand Them?

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.