The Trend toward Voluntary Corporate Disclosures: Voluntary Disclosures Are of Growing Importance in Today's Capital Markets. but What Information Is Reported? How Is This Information Reported? and What Are the Benefits and Problems Associated with These Voluntary Disclosures?

Article excerpt

The contemporary phenomenon of market globalization has resulted in companies becoming more international in their orientation and has also led to increased complexity in the business environment. While capital markets now offer unforeseen investment opportunities, one important development associated with these trends is the tendency for investors to be confronted with an abundance of information about myriad corporate activities. In addition to making the required compulsory disclosures, more and more companies are disclosing information on a voluntary basis--presumably in the hopes that this extra data will hasten the stock market to recognize hidden elements of corporate value.

While no one would dispute that there is a growing trend toward increased corporate disclosures, the current trickle of voluntary disclosures may soon metamorphose into a veritable river of additional information. In this article we provide some insights into why the value gap is responsible for the enhanced demand for extra disclosure. We also outline some of the more important frameworks that have emerged in the contemporary literature on disclosures, and we explore the potentially critical impact of XBRL (eXtensible Business Reporting Language) on this topic. Finally, we present our views about some of the likely implications of the trend toward additional voluntary disclosures.


The primary objective of traditional financial reporting is the disclosure of financial data within the framework of Generally Accepted Accounting Principles (GAAP). Today most companies in the developed world report under either one (or sometimes both) of the two dominant sets of accounting standards: U.S. GAAP and International Accounting Standards (IAS). Nevertheless, despite their global importance, both sets of accounting standards have major deficiencies from a capital market perspective. For example, conventional standards provide a huge scope for managerial profit manipulation. In addition, the retrospective nature of the financial reporting process means that the reported data is not always a reliable basis for forecasting future performance, which can result in a loss in credibility from a stakeholder perspective. Furthermore, contemporary accounting reports focus almost exclusively on quantitative data and, typically, reveal little about issues such as investment risks and the long-term effects of capital investments. In addition, key drivers of corporate value in critical areas of the business are not reported to investors under the traditional accounting model, for instance, human capital, customer relations, innovation, research and development (R&D), and corporate reputation.

In recent years, however, both theorists and practitioners have begun to recognize the inherent shortcomings of traditional reporting and have developed models for additional voluntary disclosure (e.g., the ValueReporting[TM] framework developed by PricewaterhouseCoopers

(PWC), which is discussed later). (1) These business-reporting frameworks promote providing information supplementary to the traditional financial report and may help investors to better identify value-driving activities. Although the developments in the field are emerging on a rather piecemeal basis, voluntary reporting is now, nonetheless, gradually being accepted as part of the company's official external reporting.


In general, developments in voluntary reporting are to be welcomed because of their capacity to reduce existing information asymmetries (or information gaps) between shareholders and management. Figure 1 provides an overview of these gaps. A perception gap exists if the utility of information is perceived differently by the market than by the company. An understanding gap occurs when the different stakeholders and management assess the data in different ways. An information gap means that key performance data from the perspective of market participants is not communicated to them adequately. …