Readability of Management's Discussion and Analysis for Local Governments

ABSTRACT The Governmental Accounting Standards Board issued Statement 34 in June 1999, requiring governmental entities to prepare a Management Discussion and Analysis (MD&A) as part of their Comprehensive Annual Financial Reports. Statement 34 also reiterated that citizens are considered users of governmental financial statements and the MD&As. This paper discusses various readability measures and uses them to evaluate municipal MD&As. We found that most of the reviewed MD&As have average readability measures of grade 9 or higher. The finding is not as unequivocal as desired, however. The Flesch-Kincaid measure differs by four grades depending upon the source of the program used (Grammatik or Readability Plus for Windows). The results of the current study may influence local governments to write the governmental MD&A at a lower reading level and use a more understandable writing style. INTRODUCTION The Governmental Accounting Standards Board (GASB) issued Statement 34 in June 1999, requiring governmental entities to prepare a Management Discussion and Analysis (MD&A) as part of their Comprehensive Annual Financial Reports (CAFRs). The MD&A discusses financial performance, capital resources, budgets, and issues and trends relating to the governmental entity's financial position or results of operation. One of GASB's justifications for Statement 34 was "greater accountability by providing more useful information to more users" (Statement 34, paragraph 184). GASB Concept Statement #1 states that citizens are one of the three groups of users of governmental financial statements. According to Statement 34, "the fact that few citizens or legislators currently read their financial reports does not mean that they never will, especially if the financial reports can be made more understandable and more useful to them" (Statement 34, paragraph 194). To reach this new user group, particular care is required to explain the governmental entity's financial position simply and clearly. Readability is "that quality in writing which results in quick and easy communication. Readable writing communicates precisely and with a single reading" (Lesikar and Lyons, 1986, p.21). Since GASB identified three groups of primary users, and purposefully chose to set no group as having priority, readability is of particular importance. This paper reports on readability of MD&As in CAFRs of early adopters of Statement 34. It discusses various readability measures and applies them to the MD&As of municipal entities of all sizes. It discusses five readability measures and correlates them to characteristics of the entities. STATEMENT 34 The CAFR must provide governmental accountability to citizens, legislators and creditors. It is important for constituents of a governmental entity to understand how resources are being raised and how they are being utilized. The new requirements of GASB Statement 34 are designed to make CAFRs easier to understand and are considered "the culmination of years of planning and discussion on how to get governments to provide a clearer picture of their financial well-being" (Valuing Infrastructure, 2000). GASB prepared guidelines for the MD&A, but style and format of presentation are at the discretion of management. An important aspect of the MD&A is the requirement of financial managers to share with constituents an analysis of the governmental entity's financial performance that is both readable and understandable. In essence, the MD&A section should provide citizens with information necessary to assist them in evaluating whether the entity's financial position has improved or worsened as a result of the current year's operation. It is crucial for the information to be displayed in a manner that is readable and understandable by the average United States citizen. GASB structured the new financial reporting model to be implemented in three phases. …