THE READABILITY OF FINANCIAL STATEMENT NOTE DISCLOSURES

Daniel Tschopp
Saint Leo University

Doug Barney
Indiana University Southeast

Passard C. Dean
Saint Leo University

ABSTRACT

The purpose of financial reporting is to help users make informed decisions. Over time
the reporting process has become more and more complex. Reporting standards and rules have
increased both in terms of quantity and sophistication. Because of this, it is important to ask the
question about the basic premise of financial reporting – is the information being reported by
companies useful to its intended users?
This study examines the financial statement notes of the 30 companies that comprise the
Dow Jones Industrial Average. Readability tests are performed on the financial statement notes
for the years 2000, 2010 and 2015 to determine if the information being reported can be used by
the average user and if the level of complexity has changed over time.
The results revealed that the use of the passive voice in financial statement note
disclosures has not changed over time. However, based on the Flesch Reading Ease score, the
results revealed that over time the readability of disclosures notes has decreased. The declining
trend in readability of financial statement note disclosures is a cause for concern because it is
important the users of these statements are able to understand the information provided to them so
they can make the best decisions.

Keywords: Financial Statement, Dow Jones, financial reporting, Flesch Reading Ease score