Full_Disclosure

Full Disclosure Paper This paper will go over the full disclosure principle and why this disclosure has increased substantially in the last 10 years. The need for full disclosure in financial accounting will be addressed and examples will be given. A few consequences and problems that may arise form failing to properly disclose certain items in financial statements are given in this paper to give the reader a clearer view on why full disclosure is necessary. The full disclosure principle calls for financial reporting of any financial facts, significant enough to influence the judgment of an informed reader. This disclosure requires companies to give expanded information in their reporting. The full disclosure principal is very beneficial in helping cut down on fraud and also helps the investor make an informed decision. The full disclosure principal may add to the work load of accountants, but in most instances the benefits outweigh the cost. Take the Enron scandal for example and their off-balance sheet accounting frauds. The financial statements can be an easy target for fraudulent activity. This is due to information being removed or falsely reported by company employees or auditors. Full disclosure in financial reporting is needed to prevent this type of behavior and give the public an accurate picture of the company. The need for full disclosure requirements in financial reporting comes from the following: Complexity of the Business Environment. The increasing complexity of business operations magnifies the difficulty of distilling economic events into summarized reports. Such areas as derivatives, leasing, business combinations, pensions, financing arrangements, revenue recognition, and deferred taxes are complex. As a result, companies extensively use notes to the financial statements to explain these transactions and their future effects. Necessity for Timely Information. Today, more than ever before, users are demanding information that is current and predictive. For example, users want more complete interim data. Also, the SEC recommends published financial forecasts, long avoided and even feared management Accounting as a Control and Monitoring Device. The government has recently sought public disclosure of such phenomena as management compensation, off-balance-sheet financing arrangement , and related party transactions. An “Enronitis” concern is expressed in many of these newer disclosure requirements, and the SEC has selected accountants and auditors as the agents to assist in controlling and monitoring these concerns.(Kieso, D. E., Weygandt, J. J., Warfield, T. D., 2007) Problems can arise from failing to disclose certain items in financial statements. The investors of the company would be given a distorted view of the financial statements due to the company failing to disclose certain items. A company could be charged with fraud for not fully disclosing information in the financial statements. The Sarbanes-Oxley Act of 2002 was enacted to promote effective accounting controls and ethical business practices. To remain compliant with the Sarbanes-Oxley Act, some companies have to invest more time and money in financial statement reporting. This is a consequence that was brought about due to corporate scandals such as Enron, Worldcom (MCI) and Tyco International. Section 404 of the Sarbanes-Oxley Act is one of the most burdensome areas for companies. Section 404 states, “Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting Activities.” (Sarbanes-Oxley Act 2002) The above rules and regulations have arisen from the consequences of companies failing to disclose financial information. These rules and regulations create much needed boundaries for companies and also give the public more trust in companies when looking to invest. Although it is more time consuming and costly for companies to follow the requirements of the Sarbanes-Oxley Act, it remains to be the most effective way to monitor internal controls and bring back the accuracy of financial statements within a company. References Kieso, D. E., Weygandt, J. J., Warfield, T. D. (2007). Intermediate Accounting, 12th Ed. John Wiley & Sons, Inc. 111 River St., Hoboken, NJ Sarbanes-Oxley Act 2002. Retrieved on February 21, 2010 from http://www.soxlaw.com/s404.htm