Sell-Side Financial Analysts' Quarterly Reports and Opportunities for Assurance Services
Posted: 29 May 2003
Abstract
The Jenkins Committee (AICPA 1994) concluded that the current financial reporting model was not adequate to meet the informational needs of investors. Central among the committee's findings was that investors needed more information to assess the future prospects of a firm, such as information about key non-financial performance measures and strategic business plans. So far, the FASB has done little to address the committee's recommendations. However, over the last decade, there has been a substantial increase in the amount and availability of firm specific information in the market place. Indeed, advances in information technology have enabled sell-side research analysts to widely disseminate a broad range of firm specific financial and non-financial information in their stock recommendation reports, which are widely used by institutional investors, buy-side research analysts and other financial professionals.
This study has three purposes. The first is to explore the comparative reference to the various components of financial information, non-financial performance indicators and other information in the research reports disseminated by sell-side financial analysts. The second purpose is to examine how the nature of this information varies for "new economy" companies whose value drivers primarily relate to intangible assets such as intellectual property versus "traditional economy" companies. The final purpose is to determine the level of assurance that is currently provided on different types of financial information and non-financial performance indicators that are disseminated by analysts as a basis to identify areas of market potential for the provision of assurance services by members of the accounting profession. The paper works off the premise that the sell-side analyst is not necessarily a competitor to the accounting profession in providing information to the marketplace, but that value can be added to this process by the assurance provider in improving the quality of the information inputs provided by this group.
We content analyzed nearly 7000 information items contained in 64 sell-side research analyst reports for firms in four different industries. We traced these items to the SEC's EDGAR database and also elicited classification by a highly experienced audit partner with respect to current status of assurance on various items. The results indicate that a significant portion of the information that is disseminated by sell-side research analysts has no assurance provided by auditors. Moreover, this proportion is significantly greater for "new economy" companies as compared to "traditional economy" companies. These results are important because they lay an important foundation for assurance providers in identifying potential market opportunities within the emerging and ever-changing investment information marketplace.
JEL Classification: M41, G12, G29
Suggested Citation: Suggested Citation