Full Disclosure Paper

Full Disclosure Paper

This paper will answer the question two from the end of chapter 24. The question has two parts. The first part asks, “What is the full disclosure principle in accounting?” (Kieso, Weygant, & Warfield, 2004). The second part of the question asks, “Why has disclosure increased substantially in the last 10 years?” (Kieso, et al., 2004). This paper will also include an explanation of the need for full disclosure in financial reporting as well as identify possible consequences of failing to properly disclose certain items in financial statements.

The full disclosure principle in accounting states, “…any and all information that affects the full understanding of a company's financial statements must be include with the financial statements” (Bookkeeper List, n.d.). Some information such as pending lawsuits, losses due to fire or flood and mergers will need to be disclosed in the notes that accompany the financial statements, even though sometimes they may not affect the ledger accounts. However, full disclosure does mean more than the financial statements and the notes that accompany the statements. The financial statements themselves disclose some information such as earnings per share, revenues etc. The notes provide more information such as the method of depreciation used. The annual report provides even more information. Specifically, the annual report contains Management’s Discussion and Analysis (MD&A). The MD&A includes information about an organization’s liquidity, capital resources as the results of operations. (Kieso, et al., 2004) Other types of disclosure include management’s forecasts, certifications regarding internal controls, news releases and other reports filed with government agencies. (Kieso, et al., 2004)

Disclosure has increased substantially from what was required years ago mainly because of the Sarbanes-Oxley Act of 2002 (SOX). This act “…came as a result of the large corporate financial scandals involving Enron, WorldCom, Global Crossing and Arthur Andersen” (Sarbanes-Oxley 101, 2005). Among other requirements, SOX requires all publicly traded companies to disclose more information.

Full disclosure is necessary because those who use the financial statements of an organization rely on the information be accurate and not misleading. When the financial information provided is not accurate and complete the economy can be negatively affected. Billions of dollars can be lost by corporations and investors and investor trust decreases. (Sarbanes-Oxley 101, 2005). There are consequences for companies that fail to disclose required items in their financial statement, for example in the supplemental balance sheet. The information in the supplemental balance sheet includes four sections: contingencies, accounting policies, contractual situations and fair values. Each of these sections has similar ramifications if not disclosed. Contingencies are “material events that have an uncertain outcome” (Kieso, et al., 2004). Pending litigation, tax operating loss and environmental issues are all examples of contingencies. Failure to disclose contingencies may lead to a material misstatement. If for example, a company was being sued for X number of dollars, and lost the case, there would be a new liability for the amount and if the lawsuit had not been disclosed, the financial information provided on the balance sheet would be incorrect. The section disclosing a company’s accounting policies would include information about inventory valuations and which method is used in figuring