Abstract: The purpose of this paper is to Answer Question 2 in chapter 24 of Intermediate Accounting; explain the need for full disclosure in financial reporting and to identify the possible consequences of failing to properly disclose certain items in financial statements.
Full Disclosure Paper
Ch. 24 – Question 2
“What is the full disclosure principle in accounting?” According to our text, “the full disclosure principle calls for the financial reporting of any financial facts significant enough to influence the judgment of an informed reader” (Intermediate Accounting, 2010). “Why has disclosure increased substantially in the last 10 years?” There is no one reason why disclosures have increased substantially in the past 10 years; according to our text, “the reasons for this increase in disclosure requirements are varied, some reasons may be the complexity of the business environment, the necessity of timely information, or the accounting as a control and monitoring device” (Intermediate Accounting, 2010).
Need for Full Disclosure in Financial Reporting
What people have understand is that there is more to full disclosure then just a financial statements and the notes that come with the statements, that statement themselves disclose information such as revenues, earnings per share, etc. Full disclosures are needed because those that use financial statements of an organization rely on the information to be accurate and not false or misleading. A lot of money could be lost by an organization which makes the investors trust decrease. Full disclosures were created to protect the safety of businessmen and investors. Full disclosures exist so that people from potential investors to executives can be made aware of the financial status of the organization. If full disclosures didn’t exist, some companies may try to with hold information that may bring forth a negative light upon their organizations’ financial status. Also withholding information can lead to investors being mislead into making unintelligent decisions.
Possible Consequences for failing to Disclose Financial Reports Properly
If an organization fraudulently discloses a financial report, some serious consequences may be bestowed upon them. Not only would it mess up the organizations financial reputation and turn away potential investors or shareholders, depending on how bad the situation is, the organization can be fined a large amount of money for discrepancy and misconduct involved with their financial statements or accounting information. The organization can also be charged with fraud.
After numerous accounting scandals that affected the financial and accounting industry, the U.S. government created the Sarbanes-Oxley Act. Sarbanes-Oxley Act was enacted in 2002; it was “to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards” (Investopedia, 2012).
Using the full disclosure principle in accounting could be one of the best decisions made by the industry. Full disclosures help disclose financial information that should be accurate and safe for investors or shareholders to use when trying to figure out the financial status of a potential investment.
Full disclosures are needed to protect the safety of business men and investors, whether the report brings forth a negative or positive light toward to financial status of an organization – the truth and accuracy of a financial report is always better.
For those who want to report fraudulent financial reports, there will be consequences for your actions. Thanks to the Sarbanes-Oxley Act (SOX) of 2002, organizations must now mandate strict reforms to improve financial disclosure. Failure to do so can result in a major fine towards the organization, bad reputation for the organization which can lead to organization shutting down, or if drastic enough – jail or prison time. So as one may see full disclosure are essential to the accounting industry and will be for a while, meaning as long as there is still an accounting industry.
Investopedia. (October, 2012). Sarbanes-Oxley 2002. Retrieved from http://www.investopedia.com/ terms/sarbanesoxleyact.asp Keiso, D. W., Weygandt, J. J., & Warfield, T. D. (2010). Intermediate Accounting (13th ed.). Hoboken, NJ: John Wiley & Sons.