Acc 421 - Intermediate Financial Accounting I - Full Disclosure

Full Disclosure

Gary Varnell

University of Phoenix

ACC 421 Intermediate Financial Accounting I

Mary Derx-Robinson

April 18, 2011

The accounting profession has adopted a full disclosure principle in which companies and accountants must financial information that would have a significant impact on the judgment of an informed reader of the financial statements of the company. This paper is designed to explain the need for full disclosure in financial reporting, identify possible consequences of failing to properly disclose certain items in financial statements, and how disclosure has increased over the last 10 years.

The full disclosure principle "recognizes that the nature and amount of information included in financial reports reflects a series of judgment trade-offs" (Kieso, Weygandt, and Warfield 2007 p. 42). These trade-offs strive to provide sufficient detail to disclosure matters that will make a difference to users yet be sufficiently condensed so that the information is understandable. The full disclosure principle dictates what does and does not appear on the financial statements that users are interested in. The full disclosure principle affects all of the financial statements by either requiring a company to disclose important financial information on the financial statements as an actual entry on the financial statement, a note to the financial statement which will "generally amplify or explain the items presented in the main body of the statements" (Kieso, Weygandt, and Warfield 2007 p.42), supplementary information, and even letters to stockholders. It is important for companies to fully disclose financial information that relates to their company if the users that they are attempting to reach are to be able to best analyze the company and make an informed decision regarding whether to invest in a company or to extend credit to a company. If a company does not fully disclose important financial information as required by the full disclosure principle there can be severe consequences.

After numerous accounting scandals that affected the financial and accounting industry,the United States government enacted the Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (SOX) was enacted in an effort to increase the consequences of companies and individuals who improperly report financial information. The most important section of SOX is Title IX. Thise section deals with the penalties that violators of SOX will face. "Violations of this provision carry a fine of $500,000 and up to five years in prison" (Encyclopedia of Small Business 2007 p. 1002). As a result of SOX, the amount of disclosure has increased over the last 10 years.

With the recent accounting scandals such as those at Enron and WorldCom, the United States