Full Disclosure vs. Effective Disclosure: As a Guiding Principle for Financial Reporting, "Full Disclosure" Is Being Overtaken by "Effective Disclosure."

By Pounder, Bruce | Strategic Finance, August 2012 | Go to article overview
Save to active project

Full Disclosure vs. Effective Disclosure: As a Guiding Principle for Financial Reporting, "Full Disclosure" Is Being Overtaken by "Effective Disclosure."


Pounder, Bruce, Strategic Finance


"Full disclosure" has long been a guiding principle for financial reporting. Yet there are clear signs that this principle isn't as useful as it once was in ensuring that the information needs of report users are met. In this month's column, I'll explain why full disclosure is no longer a useful goal. I'll also briefly describe how standards setters and regulators have begun to shift their focus from full disclosure toward effective disclosure.

"Full" Is Subjective

The word "full" conveys completeness. As such, it implies the existence of a quantitative and/or qualitative benchmark against which completeness can be assessed. Then what's the appropriate benchmark to use in assessing whether disclosures that are included in financial reports are "full"? The answer depends on the reporting entity and report users.

Financial-reporting standards, such as U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), require each reporting entity to make specific disclosures in notes that accompany the entity's financial statements. But financial-reporting standards vary among countries and types of entities. As a result, full disclosure for one entity could be a subset of, a superset of, or simply different from full disclosure for another entity. Thus, from the entity's perspective, financial-reporting standards provide only a subjective benchmark for assessing the fullness of disclosures in financial reports.

[ILLUSTRATION OMITTED]

Additionally, stakeholders of an entity may expect more, less, and/or different disclosures than those that are prescribed by a particular set of financial-reporting standards. For example, in early 2012, Chesapeake Energy Corporation's shareholders were dismayed to learn that the company's chief executive officer (CEO) had engaged in certain personal financial deals with third parties--previously undisclosed transactions that were perceived as having the potential to compromise the CEO's fiduciary duty to the company's shareholders. The revelation of those transactions caused Chesapeake's stock to lose $500 million in market value. But my research into this matter led me to conclude that Chesapeake had not failed to adhere to the disclosure rules of U.S. GAAP or the regulations of the U.S. Securities & Exchange Commission (SEC). Does that mean that Chesapeake's investors shouldn't have been upset? No. In this case, investors' subjective benchmarks for full disclosure hadn't been met even though standards-based benchmarks were met.

As illustrated, the "full" in "full disclosure" is very subjective. Because we lack widespread agreement on what "full" means, "full disclosure" isn't really a useful principle for guiding financial reporting.

"More" Isn't Necessarily "Better"

Given that a universally accepted, objective standard for "full" disclosure doesn't exist, can we simply assume that more disclosure is always better than less disclosure? No. For three specific reasons, more disclosure isn't necessarily better.

First, as I summarized in my September 2011 column, recent reports from various organizations throughout the world have emphasized that expanding disclosure requirements in financial-reporting standards is actually undermining the usefulness of the disclosures that entities provide.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Full Disclosure vs. Effective Disclosure: As a Guiding Principle for Financial Reporting, "Full Disclosure" Is Being Overtaken by "Effective Disclosure."
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?