FULL DISCLOSURE IN FINANCIAL ACCOUNTING Essay Example

Full disclosure in accounting 4

May 23, 2011

Question 1

Full disclosure in accounting refers to the means through which management communicate firm performance and governance to the relevant users. For instance, capital markets require having full disclosure for it to function efficiently as well as help the investors in their decision making. Firms can provide disclosure through preparing financial statements, regulated financial reports, management discussions and analysis and including footnotes. Some firms disclose their financial accounting information by engaging in voluntary communication. For example through management forecast, presentation by analysts, internet sites, press releases and other corporate reports. Moreover, information intermediaries such as industrial experts, financial press and analysts can engage in the disclosure of firms accounting information (Healy & Palepu, 2001).

When accountants are unable to predict end users’ information needs, it becomes difficult for them to achieve full disclosure of the financial accounting information. Information differences arising between entrepreneurs and investors can result to the breakdown in the functioning of the capital markets. Whenever the information problems between the accountants and investors are not fully resolved, the capital market is likely to incur undervaluation problems. This means that the capital market will undervalue some good ideas at the expense of the bad ones (Healy & Palepu, 2001). Several solutions have been put forward to mitigate or solve the information problem. Firstly, accountants can enter into most favorable contracts with the investors so as to allow incentives for full disclosure of confidential information. There can also be some regulations that oblige managers to fully disclose their confidential information. Financial analysts and rating agencies can also engage in private information production so as to unleash the manager’s superior information (Healy & Palepu, 2001).

Question 2

There have been a significant growth and developments in Social and Environmental Auditing Reporting (SEAR). These current developments in the social and environmental reporting have brought with it an increase in the attestation or verification by auditors statements that are attached to the reports submitted. It has ensured that the accounts and statements are evaluated and analyzed by auditors before reporting. There is a close relationship between the social and conventional accounting and the accountants are now involved in the field of SEAR accounting. Social and environment accounting has focused more on the auditing of the financial statements. It is when the organization is preparing and communicating social and environmental information to its stakeholders that SEAR is well manifested (Gray, 2000).

Social and Environment Accounting (SEA) issues have become a great concern in the accounting field. It has greatly impacted on conventional accounting. SEA exposes some of unpleasant characteristics of conventional accounting and offer new accounting predicted on values. The accounting convention, is seeking to put concern on the injustices in the society and the degradation of the natural environment before engaging in SEA. They will then look for ways in which to expose accounting and finance activities (Bebbington & Gray, 1999).

However, there are myriad challenges that have faced the new field of accounting. The issues regarding the natural environment have not occupied a significant role in the accounting practice. The major challenge is brought about by the failure of the conventional accounting to encompass adequately the environment issues. Similarly, the economists fail to distinguish between the open and closed systems of environmental accounting. They fail to understand that there is much which an economist should seek to maximize for example throughput and use of resources (Gray, 1992).

References:

Bebbington, J. & Gray, R. (1999). Taking the pulse of social and environmental accounting.

Accounting Auditing & Accountability Journal, Vol. 12 No. 1, pp. 47-51.

Gray, R. (1992). Accounting and environmentalism: an exploration of the challenge of gently

accounting for accountability, transparency and sustainability. Accounting, Organizations and Society, Vol. 17, No. 5, pp. 399—42

Gray, R. (2000). Current Developments and Trends in Social and Environmental Auditing,

Reporting and Attestation: A Review and Comment. International Journal of Auditing Int. J. Audit. 4: 247-268

Healy, P. M. & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the

capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics 31 405-440