Full Disclosure in Accounting Explain the need for full disclosure in financial reporting. In the world of financial accounting, financial accounting entails the reporting of all significant information to investors so that they can undertake well-versed decisions (Kieso, Weygandt, & Warfield, 2013). In this regard, it is of paramount importance to report all relevant facts in financial statements even if it is an unquantifiable value or the rules of accounting do not dictate upon its disclosure. The principle application of full disclosure demands for informed decisions by accountants and managers.
Incidentally, one of the needs of full disclosure is that it provides creditors or investors with a realistic and true picture of an organization before undertaking any chosen action (Kieso, Weygandt, & Warfield, 2013). Furthermore, the principle of full disclosure acts as a for channel perceptive consideration on what non-financial or financial data should be incorporated in the financial statements (Kieso, Weygandt, & Warfield, 2013). Evidently, the principle statement of full disclosure is that the uses of financial statements should be able to have justifiable comprehension and identify emergent differences within the disclosed information (Kieso, Weygandt, & Warfield, 2013).
Moreover, the disclosure of such information should be displayed within supplemental information or footnotes. In this regard, the footnotes found within the financial statements normally expound on the information displayed within the main text of the financial statement. Consequently, if there is an item that is not properly understood within the balance sheet, the footnotes can act as an avenue for further clarification. Another importance of full disclosure is that it allows an equal level of operation for investors and businesses through succinct directions and projected expectations on measures for dealing with incomplete and wrongful financial accounting and reporting(Kieso, Weygandt, & Warfield, 2013).
In this regard, the rules of full disclosure provides an avenue for government officials to discipline reports of ‘book keeping’ and more so in the event that companies withhold information that leads to lose of investor cash (Kieso, Weygandt, & Warfield, 2013). In retrospect, there are defined norms from which full disclosure draws it rules. These include the international financial reporting principles, Public Accounting Oversight Board rules, and Securities Exchange Commission guidelines (Kieso, Weygandt, & Warfield, 2013).
Incidentally, another reason for the need of full disclosure is because an audit is necessary for the notes detailed in the financial statement and other related financial documents (Kieso, Weygandt, & Warfield, 2013). In this regard, an individual must possess an innate comprehension of the principle of full disclosure in order to possess a clear or unqualified opinion. This will consequently secure an unqualified judgment in regards to the financial audit. Evidently, a judgment is deemed unqualified in the event that the auditor arrives to the conclusion that the financial statements provide a fair and true account in relation to the utilized financial framework (Kieso, Weygandt, & Warfield, 2013). The provision of disclosure notes is a further reason on the need for full disclosure (Kieso, Weygandt, & Warfield, 2013).
In this regard, disclosure notes are additional notes that accompany the financial results of a company. As a result, the disclosure notes provide a pointer on the contextual performance of a company. Examples of the pertinent information displayed in disclosure notes include details of compensation and the health of top leadership, contemporary marketplace practices on corporate actions, effects legislative changes among others. The need for informing the public about the firms accounting policies is also another reason for full disclosure.
In this regard, it is important for investors to understand and be conversant with the primary policies used by a company in the recording and reporting of the operational activities (Kieso, Weygandt, & Warfield, 2013). Consequently, the investors are able to verify if the accounting policies for the company conform to the norms for industry and government. 2.
Identify possible consequences of failing to properly disclose certain items in financial statements The profession of accounting reiterates that the principle of full disclosure demands for the presentation of any pertinent financial facts within a financial statement that are bound to influence the judgment of a concerned stakeholder (Kieso, Weygandt, & Warfield, 2013). In this regard, there are possible dire consequences that would result on the failure by a public traded company to properly disclose certain items in financial statements.
Foremost, the failure to disclose certain information would evidently affect the choices of the company’s investors. A case in point was the bankruptcy debacle involving a multinational company dealing in energy trading during the late period of 2001. In this regard, the company filed an abrupt and unexpected bankruptcy case. Evidently it led to massive losses of investor funds running to billions of shillings. Moreover, the employees did not only lose the jobs but also a lifetime of life savings. Incidentally, the scandal would have been pre-empted in the event of early detection in the accounting irregularities.
A further dire consequence on the failure to disclosing information is the carrying out of criminal proceedings under the charge of fraud. The guilty company also losses investor trust and stands to lose most of its holding shares and end up bankrupt. References Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2013). Intermediate accounting (15th ed). Hoboken, NJ: Wiley