Full Disclosure Paper

Full Disclosure Paper

In broad terms, “the full disclosure principle calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader” (Kieso Ph.D., CPA, Weygandt Ph.D., CPA, & Warfifeld Ph.D., 2007, p. 1282). Adoption of the principle in 1933 was a byproduct of the economic crisis triggered in 1929. According to Cox (1985), a system of full disclosure created by the full disclosure principle: Fosters market confidence, Provides financial data users with material information, Improves the quality and timeliness of information disclosed, Contributes to the continuance of orderly markets, Reduces the costs of raising capital, and Inhibits fraud in public trade.

The full disclosure principle spurred the creation of reporting regulations covering technical financial data and non-technical descriptions about situations that have material effect on financial performance. The regulations for reporting financial data have been evolving at a rapid pace subjective to history during the past decade. The need for financial data reporting regulation improvement stems from too many examples of situations in which poor data quality or inadequate reporting standards had a causal relationship with subsequent economic turmoil. As the economy continued to grow through the first decade of 2000 new and exotic financial instruments that were not adequately covered by reporting standards came into existence. The gap between business activity and reporting standards created unsustainable economic conditions.
The most recent economic crisis highlights the need for the transparency in financial reporting that full disclosure provides. As the market evolves so must financial reporting standards. The need to stay abreast of market complexity is considerable as new ways of trading are invented each year. Economies of the world are tied together making even a single economic failure a powerful event. Tight control is required to assure the investment community and ensure the continuance of efficient markets. Compounding the issue of financial reporting is the time sensitive nature of data. The market moves at a rapid pace thereby quickly making financial data obsolete. Because the Unites States economy is the world’s largest market systemic health must be assured through the use of practical, highly structured, and up-to-date disclosure regulations. The recent financial crisis shows how systemic failure in the United States economy creates severe consequences affecting the world economy. With much at stake full disclosure is a vital aspect of fair reporting of financial data.

Failure to disclose properly all relevant financial data as required by law carries social stigma associated with ethics violations and legal consequences as described by well established legislation. When a company acts beyond the boundaries set by ethical standards, they breach trust with the community that supports business activity. When this happens, a loss of shareholder equity can occur as investors sell stock positions or credit sources can be lost. If reporting violations meet the minimum standards set forth to describe criminal activity legal action can result in forfeiture of business, fines, and incarceration of anyone found guilty of fraud. The penalties for willful misconduct are severe. A final motivation for abiding by the full disclosure principle is self-preservation. New legislation suggests there will be no more big bailouts in any future economic crises. Careful consideration will be given to financial reporting regulations because Sarbanes-Oxley mandates reporting of disclosure control methods and procedures and independent evaluation of a company’s disclosure program. The wiggle-room once used by executives to raise doubt about inclusion in fraud has been reduced by regulations that name the principal members of a company responsible for the content and context of financial statements.

Market efficiency relies on the quality and timeliness of financial data reported by companies engaged in public trading. Access to capital is reliant upon a business environment fostered by trust. When public companies disclose financial data fairly, accurately, and in a timely manner users of this data can act with reasonable assurance that all relevant facts are available to make decisions.

Kieso PH.D., C.P.A, D. E., Weygandt PH.D., C.P.A., J. J., & Warfifeld PH.D., T. D. (2007). Intermediate Accounting.

Cox, C. C. (1985). Disclosure and Investor Confidence - The United States Experience. Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/speech/1985/062585cox.pdf