Author: Admin

Is Disclosure Mandated to Complete Financial Reports?




Financial statements are the backbone of a complete financial report. In fact, a financial report is not complete if the three primary financial statements are not included. but a financial report is much more than just those statements. A financial report requires disclosures. This term refers to additional information provided in a financial report.

Therefore, any comprehensive and ethical financial report must include not only the primary financial statements, but disclosures as well.

The chief executive of a business (usually the CEO in a publicly held corporation) has the primary responsibility to make sure that the financial statements have been prepared according to generally accepted accounting principles (GAAP) and the financial report provides adequate disclosures. He or she works with the chief financial officer or controller of the business to make sure that the financial report meets the standard of adequate disclosures.

Some common methods of disclosures include:

  • Footnotes that provide information about the basic figures. Nearly all financial statements require footnotes to provide additional information for several of the account balances in the financial statements.
  • Supplementary financial schedules and tables that provide more details than can be included in the body of the financial statements.
  • Other information may be required if the business is a public corporation subject to federal regulations regarding financial reporting to its stockholders. Other information is voluntary and not strictly required legally or according to GAAP.

Some disclosures are required by various governing boards and agencies. These include:

  • The financial Accounting Standards Board (FASB) has designated many standards. Its dictate regarding disclosure of the effects of stock options is one such standard.
  • The Securities and Exchange Commission (SEC) mandates disclosure of a broad range of information for publicly held companies.
  • International businesses have to abide by disclosure standards adopted by the International Accounting Standards Board.

 

Where Did Corporate Accounting Integrity Go?


 

When a corporation deliberately conceals or skews information to appear healthy and successful to its shareholders, it has committed corporate or shareholder fraud. Corporate fraud may involve a few individuals or many, depending on the extent to which employees are informed of their company’s financial practices. Directors of corporations may fudge financial records or disguise inappropriate spending.

Fraud committed by corporations can be devastating, not only for outside investors who have made share purchases based on false information, but for employees who, through 401ks, have invested their retirement savings in company stock. Some recent corporate accounting scandals have consumed the news media and ruined hundreds of thousands of lives of the employees who had their retirement invested in the companies that defrauded them and other investors.

The nuts and bolts of some of these accounting scandals are as follows:

WorldCom admitted to adjusting accounting records to cover its operation costs and present a successful front to shareholders. Nine billion dollars in discrepancies were discovered before the telecom corporation went bankrupt in July of 2002. One of the hidden expenses was $408 million given to Bernard Ebbers (WorldCom’s CEO) in undisclosed personal loans.

At Tyco, shareholders were not informed of the $170 million in loans that were taken by Tyco’s CEO, CFO, and chief legal officer. The loans, many of which were taken interest free and later written off as benefits, were not approved by Tyco’s compensation committee. Kozlowski (former CEO), Swartz (former CFO), and Belnick (former chief legal officer) faced continuing investigations by the SEC and the Tyco Corporation, which is now operating under Edward Breen and a new board of directors.

At Enron, investigations against uncovered multiple acts of fraudulent behavior. Enron used illegal loans and partnerships with other companies to cover its multi-billion dollar debt. It presented erroneous accounting records to investors, and Arthur Anderson, its accounting firm, began shredding incriminating documentation weeks before the SEC could begin investigations.

Money laundering, wire fraud, mail fraud, and securities fraud are just some of the indictments directors of Enron have faced and will continue to face as the investigation continues, and someone is made to pay for all the wrongdoing that inflicted a great deal of suffering on the very people that depended on these white collar criminals to protect their interests.