Financial Reporting Disclosures and Issues - Research Paper Example

Financial reporting disclosures and issues of Contents Contents 2 3 Introduction 4 Research Aims and Objectives 4 Research Questions 5 Research Methodology 5 Literature Review 5 The AICPA Code of Professional Ethics 5 The Securities Act of 1933 6 The Securities Exchange Act of 1934 7 The Foreign Corrupt Practices Act of 1977 8 Section 409 of the Sarbanes-Oxley Act of 2002 8 Research Findings 9 The AICPA Code of Professional Ethics 200 9 The Securities Act of 1933 9 The Securities Exchange Act of 1934 10 The Foreign Corrupt Practices Act of 1977 10 Section 409 of the Sarbanes-Oxley Act of 2002 11 Conclusion and Recommendation 11 References 13 Abstract Disclosure of financial statements is made by companies with a view to interpret or clarify the published financial statements and such financial information. Such disclosures are necessary with a view to make investments in the business. The management uses such information to test the accuracy and reliability of information presented in the financial statements, as per the norms of the Securities and Exchange Commission. The paper tries to analyse issues that are addressed by disclosure and footnote requirements of AICPA Code of Professional Ethics, The Securities Act of 1933, The Securities Exchange Act of 1934, The Foreign Corrupt Practices Act of 1977 and Section 409 of the Sarbanes-Oxley Act of 2002. It will also evaluate the effect of such enactments in the corporate environment. Introduction Accounting disclosures are essential elements that help to formulate a recognition and measurement of accounting statements. Such disclosures bring out the basic financial statements of the company and allow for financial reporting by the same. Such information is useful for the purpose of making investments, credit decision and also, predicting company worth (Schroeder, Clark and Cathey, 2011). The most common accounting footnotes are the accounting policies, schedules and exhibits, description and rationalization of the items within the financial statements and general company information. Problems pertaining to footnote reporting do arise and are more rampant with the schedules and exhibits, which concerns income tax and long-term debts. Explanations regarding post-retirement benefits and pensions are also difficult to classify (Vitez, n.d.). The paper tries to carry out an exploratory analysis of the issues, that are addressed by disclosure and footnote requirements of AICPA Code of Professional Ethics, The Securities Act of 1933, The Securities Exchange Act of 1934, The Foreign Corrupt Practices Act of 1977 and Section 409 of the Sarbanes-Oxley Act of 2002, as well as establish the impact that such enactments have had on the corporate environment. Through such analysis, the paper shall seek to answer how these disclosure requirements and footnotes help in making informed decisions on the part of investors as well as users of such financial information. Research Aims and Objectives The aim of the research paper is to identify and evaluate various types of disclosures and footnote requirements of financial reporting standards for The AICPA Code of Professional Ethics, The Securities Act of 1933, The Securities Exchange Act of 1934, The Foreign Corrupt Practices Act of 1977 and Section 409 of the Sarbanes-Oxley Act of 2002. This analysis and understanding shall help to further establish the requirements and information disclosures, out of these, which are necessary and important for users of financial information in order to make informed choices and decisions. The primary objective of this research is to understand the basic premise and reason behind enactment of various accounting laws and to study the impact of enactment of such laws in the field of accountancy and audit disclosures. Research Questions The primary research questions, which the study shall try to address, are: 1. What are the issues addressed by the disclosure and footnote requirements of AICPA Code of Professional Ethics, The Securities Act of 1933, The Securities Exchange Act of 1934, The Foreign Corrupt Practices Act of 1977 and Section 409 of the Sarbanes-Oxley Act of 2002? 2. What is the impact of AICPA Code of Professional Ethics, The Securities Act of 1933, The Securities Exchange Act of 1934, The Foreign Corrupt Practices Act of 1977 and Section 409 of the Sarbanes-Oxley Act of 2002 with respect to the disclosures and footnote requirements stated in the various laws? Research Methodology The research shall be conducted by way of qualitative analysis of all information present in academic sources, like, books, journals and online print materials from reliable sources. Such study shall be conducted to carry out an informative analysis of the five laws pertaining to accounting practice. Each law will be studied for the disclosure requirements that it needs and the impact that such disclosures has had, when enacted. The paper shall also explore, using exploratory study, the issues that these acts try to address through their requirements in disclosures and footnotes of accounting statements. Literature Review The AICPA Code of Professional Ethics The AICPA is a professional governing body, which advocates practical ethical profession and views on how accounting should be regarded as more of a service function, rather than a profit function. There are four main parts to the AICPA Code of Conduct, the rules of conduct, the principles, ethical rulings and interpretation of such rules. The 6 major principles that are stated in the code of conduct include: 1. CPA has to practice professional judgement as a responsibility. 2. CPA should honour public trust. 3. CPA should operate with integrity. 4. CPA behaviour is guided by independence and objectivity. 5. CPA needs to exercise Due Care with a motive to develop competence and service quality. 6. CPA has to observe code of conduct principles, so as to determine the nature and scope of services provided (Allen, 2011). The Securities Act of 1933 The Securities Act of 1933 came in after the stock market crash of 1929, during the Great Depression. The main purpose behind introduction of this Act was to ensure that security buyers had complete and precise information pertaining to their purchase, before they make an investment decision. The Act required certain disclosure needs, as accurate disclosures assured investors that theoretically, the stated investment was not bad. The company required a registration statement under the Act, where registration was mandatory. This also included the requirement of a prospectus, detailed information about the security being offered, business and the company and audited financial statements of the concern. Post-signing of the registration, the company, individuals signing within the registration statement and the underwriter are to be held completely responsible for all information present within the document. Such liability called for ‘due diligence’ procedure, so that all information present within the document was tested accurate and complete. In such a manner, the law and the Act try to retain and maintain investor confidence and gain necessary market support. Any violation of the registration or prospectus requirement would lead to civil liability, under the Securities Act of 1933. The Securities Exchange Act of 1934 The Securities Exchange Act of 1934 governs secondary market trading of securities, like, shares, debentures and bonds. As per requirements of this law, the Act binds financial market and participants within it in statutes, as a base for regulation. The Act of 1934 had also led to the establishment of Securities and Exchange Commission, which is the sole responsible authority for securities law in the United States. The Act regulates the physical place, where such securities are traded and where middlemen, who conduct buying and selling of securities, provide liquidity to the system. This Act controls the digital platform, where such securities are traded, like, the NASDAQ. The Act also controls smaller markets, like, alternative trading system (ATS) and requires them to be registered under NASD as an exchange. The Act also expands the requirement of prospectus and registration, stated in the Securities Act of 1933 to the secondary market for a stipulated section of companies. Such requirement involves regular disclosures of company information through forms 10K and 10Q. Companies also have to file the 8K to report any significant changes within the company. This helps to establish a better assessment of company worth and ensures a safer transaction of securities. For the anti-fraud provisions, the Act protects investors from price manipulations, which can affect by the formation of pools. Section 10(b) of the Act protects investors from being deceived by any mails or other means for interstate commerce (SEC, n.d.). Sections 10b-5 protects investors from insider trading. This involves securities trade by any member, who has access to company information, which is not available to others or the traders, in general. This also includes officers of the company, who deal with company shares, without any corporate disclosures or material corporate information. The Foreign Corrupt Practices Act of 1977 The Foreign Corrupt Practices Act has two primary provisions; the first one stated within Section 102 has been enacted to increase accountability among corporate, while disposing their corporate assets. The Act requires corporate to keep records of such disposition of assets in the books of accounts with reasonable detail. The section also wants companies to keep an internal accounting control mechanism that shall make sure that all such dispositions have managerial approval and records are maintained with desired accuracy, along with access to such assets being limited to people who have been authorised with such rights. This assured that companies that complied with rules of Section 102, found it difficult to misuse corporate assets, which might avoid any detection and funds or shall allow for dubious foreign payments. The second provision of the Foreign Corrupt Practices Act is stated under Section 103 and 104 and it renders bribery to foreign officials as a criminal offence. Section 103 talks about such people, who come under the SEC jurisdiction, while Section 104 incorporates all domestic organizations. These sections elaborate on the extent of prohibited payments and violation sanctions (Ball, et al., 2012). Section 409 of the Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 brought forth Section 409 in June 2002, with a view to establish a law for real-time disclosure requirements. This Act requires all company issuers, who fall under section 13(a) and 15(d), to mandatorily disclose any additional information, which concerns the material changes arising in company’s financial condition or operational activity of the issuer on a real-time basis. This means that quick and attentive reporting of such changes is to be done in plain English and can encompass any trend, graphic presentation or qualitative information, as per law determined by the Commission. Such information is deemed useful and necessary for investor protection and is brought out in public interest (University of Cincinnati College of Law, n.d.). As per the popular opinion, the Sarbanes-Oxley Act disclosure requirements have fore-grounded tremendous paperwork needs, which have had little effect in practice. This Act was enacted after the Enron failure, but does not do as much as expected from the theory. The amendment of the section 13, within the Act, implies that in event of any changes in the operational or financial position of the company, reporting for the same needs to be done within 48 hours and such information should be presented in a manner, which is best understood by the public at large. This also includes the potential investors. Such an attempt required tremendous data accuracy in the financial statements and also, maintained disclosures that were not done yet. Research Findings The AICPA Code of Professional Ethics 200 The AICPA code was developed to meet the expectations and trust gap, which accountants faced with the society (MNCPA, n.d.). The incoming of the code of conduct from AICPA evaluated a firm’s ability to continue as a going concern, widened the scope of auditor responsibility for considering internal control system reliability in audit planning and describe audit responsibilities of reporting for irregularities, errors and illegal acts performed by their clients. Such a move helped to regain confidence of the society in the accounting profession. The AICPA code is more rule based (Allen, 2010). The code has undergone convergence and reorganization to maintain the standards of ethics with a view to formulate a more conceptual framework, which allows for expansion of scope of the code (Goria, 2013). The Securities Act of 1933 The Securities Act of 1933 served the sole purpose of making issuance process for securitises more transparent and investor-friendly. The requirement of registration by the issuer required them to meet certain specified criteria, prior to making issue and sale of such securities legal. Such information disclosure in the registration process was viewed to be very detailed and intricate. Such detailed information provision allowed investors the access to more information, pertaining to their investment as well as to make a wise choice, while making investment decisions. Such measures also minimised the sale of fraudulent securities through complex compliance norms and regulations. This Act put severe liabilities on the underwriters, thereby making bankers more cautious, while handling security issuance matters and understanding the meaning of investor welfare in its entirety. This legislation improvised on the needs for ethical standards maintenance in security trading platform. The need for a 20 day gap between dissemination of security information and actual issue of share allowed buyers the time to analyse and make informed decisions about their investment plan. Earlier, short time allowance forced investors to make uninformed and hurried investment decisions. The Securities Exchange Act of 1934 The Securities Exchange Act of 1934 helps in protecting investors through higher requirement of making disclosures. Along with this, the Act also demands for prohibition of fraud with severe implications to those who defraud investors. The Act threatens to bring in the civil enforcement into action in the event of fraud and charge for criminal offence for certain specified violations. The Act also equips investors to file a private suit in the event of defraud (Sechistorical, n.d.). Issue of shares, bonds and debentures involve huge volume of money and a large amount of public is involved here. Such regulations brought in tremendous control within the issue process and mechanism. Such transactions occur in national and public interest and regulations eliminate impediments to the market systems and instil trust in transaction and trading. Security prices are subject to frequent manipulations and susceptible to speculation. Such a mechanism needed regulation to control unreasonable and sudden price fluctuations, which was brought forward by the Securities Exchange Act of 1934 (Sarkar, n.d.). The Foreign Corrupt Practices Act of 1977 Implementation of the Foreign Corrupt Practices Act 1977 brought forth a number of drawbacks. Corporate felt that provisions of the anti-bribery act had made them lose out on numerous foreign businesses and also, the provisions of accounting controls involved more costs than benefits. The anti-bribery provisions of the act were termed to be vague and ambiguous in many places and it was largely felt that the absence of any international anti-bribery law in agreement with the national law was deterrent to their businesses. The effect of the anti-bribery provision was not largely detrimental in practice. The argument provided by the proponents was that the presence of such an act would make US business appear as one with integrity and forthright. This would make sure that traders did business with US, only for their high quality products without need for any bribery. FCPA was also charged of being unpredictable, but with establishment of a Review Procedure, an assured remedy to this problem was established. The guidelines provided by the Department of Justice Review Procedure further clarified the distinction between legal and illegal transactions. Section 409 of the Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act mandated higher standards of accountability by incorporating effectiveness in managing internal control and financial reporting procedure for companies. The management has become more responsible because they are supposed to sign the quarterly reports for assuring that annual reports presented are accurate. Maintenance of internal controls and supporting them with evaluated procedural compliances make it easier for the management to meet the requirements stated within the Act. This Act has also brought about a major change in the way the companies view data management and data integration. This is because organizations are required to provide a control documentation, which includes manuals, memoranda, effectiveness of control details and flow charts (Jyoti, 2005). The problem arises when one has to look through the implementation of these, in term of technological availability, which is needed to maintain such data integration. The section 409 requires the companies to report the operational and financial changes within 48 hours and most companies find it difficult to comply with the time requirements. This is because large companies have huge data sets that are maintained in MS Excel spreadsheets. The absence of software support has made it difficult to report required changes in a timely, cost-efficient and effective manner. The best of the solutions, like, the one provided by Dun & Bradstreet, take about 4 business days to comply with Sarbanes-Oxley Act requirements. Conclusion and Recommendation Financial disclosure statements are explanations and comments, which are put down within financial statements of the company or in documents, which are filed publicly and uphold a detailed overview of the company’s procedures and processes in such disclosures. Such disclosures are ruled and guided by the GAAP principles of similar principles, which lay the standards for accounting and the Securities and Exchange Commission for companies that are traded on the public platform. Such disclosure requirements vary depending on the size and nature of company activities. However, as a norm, large companies that are publicly traded have more disclosure requirements, than the smaller ones. Such high disclosure requirement for publicly traded companies emerges from the argument that investors invest their personal savings in large amounts within such companies and it is a responsibility, on the part of these companies, to ethically report all information, which is necessary for investors to make an informed investment decision. Such mandates of disclosure had come about after the frauds of Enron and Worldcon and since then, information disclosure of companies and their audit firms is guided by several legislations, including both financial and non-financial disclosures. The Sarbanes-Oxley Act also highlights the need for making non-financial disclosures pertaining to management’s role, internal control mechanisms and level of financial expertise of the management. References Allen, C. (2010) Comparing the Ethics Codes: AICPA and IFAC. Retrieved form http://www.journalofaccountancy.com/Issues/2010/Oct/20103002.htm Allen, C. (2011) Improving the Code of Professional Conduct. Retrieved form http://www.journalofaccountancy.com/Issues/2011/Jun/20113740.htm Ball, D., McCulloch, W., Frantz, P., Geringer, J. M. and Minor, M. (2012) International Business. New York: McGraw-Hill Higher Education. Goria, A. (2013). User-friendly AICPA ethics code on horizon. Retrieved from http://www.journalofaccountancy.com/news/20137808.htm Jyoti. (2005) The Effects of Section 409 of the Sarbanes-Oxley Act of 2002 on the Integration of Financial Data. Retrieved from http://it.toolbox.com/blogs/financial-data/the-effects-of-section-409-of-the-sarbanesoxley-act-of-2002-on-the-integration-of-financial-data-5184 MNCPA. (n.d.) 8 ways CPAs violate the AICPAs ethics requirements. Retrieved from http://www.mncpa.org/publications/footnote/2012-06/8-ways-CPAs-violate-AICPAs-ethics.aspx Sarkar, D. (n.d.) Securities Exchange Act of 1934. http://facweb.northseattle.edu/pbouker/instructor/ACC275_Folder/Lesson%204--Professional%20Ethics.htm Schroeder, R. G., Clark, M. W., and Cathey, J. M. (2011) Financial Accounting Theory and Analysis: Text and Cases. New Jersey: John Wiley & Sons. SEC. (n.d.) The Laws That Govern the Securities Industry. Retrieved from http://www.sec.gov/about/laws.shtml Sechistorical. (n.d.) Fair to All People: The SEC and the Regulation of Insider Trading. Retrieved from http://www.sechistorical.org/museum/galleries/it/fullDisclosure_a.php University of Cincinnati College of Law. (n.d.) The Sarbanes-Oxley Act of 2002. Retrieved from http://www.law.uc.edu/sites/default/files/CCL/SOact/sec409.html Vitez, O. (n.d.) What Are Financial Statement Disclosures? Retrieved form http://www.ehow.com/about_5156814_financial-statement-disclosures.html Read More