Beneath the Law of Ethics, many officials of the public and staff do file annual reports, known as the Financial Disclosure Statements (FDS), its purpose is to make known to the public certain required financial information that was previously known only to a few people or that was meant to be kept a secret.
The anticipated outcome that is intended of the financial disclosure prerequisite is to prompt public executives of financial attentions that may be in disagreement with the social force that binds them to the responsibilities required of them and to help native or naturalized members of a state or other political community and the three agencies supervising the system of principles governing morality and acceptable conduct in supervising the areas of possible disagreement of interest of among public executives.
Public disclosure functions as something immaterial that interferes with or delays action or progress to public officials considering an activity that may result in a conflict.
Nevertheless, similar to the document giving the tax collector information about the taxpayer’s tax liability, the FDS manifests or brings back private financial information for the whole calendar year existing or coming before. Therefore, there is a statement to be filed in 2010, it will replicate the financial good of the clerk during the entire year of 2009, hence being depicted as a 2009 FDS.
Introduction
If you are debating on making an investment in any company, it may be necessary to download and print a copy of the investment offer. If there is no prospectus and financial statement of the company in the documents of sale, it is advisable to ask for one. But if you are told that the company doesn’t have one, then it is necessary to request or ask for a written financial disclosure about the company.
All in all, one should have the following information
Offer circular
This is a written document or agreement that presents the investment.
Prospectus
An official written report that states the condition of public security or mutual fund offering. The prospectus is necessary to disclose both positive and negative information to shareholders about the projected offering.
Annual report
A written report that has statements by the chief executive officer, giving an account about the previous year’s performance, and an overview of the coming year’s performance. In any organization, financial statements may include a record of the financial situation of an organization on a particular date by listing its assets and the claims against those assets, a financial statement that gives operating results for a specific period, a report of cash flows, and booked earnings.
Audited financial statements
Financial statements audited by a certified public accounting firm (Sindell, Kathleen 349).
In backing up economic expansion, the Inter-American Development Bank directed people’s attention to significant assets on the development of financial markets. One of the major building blocks of competent and successful financial markets is the existence of and access to dependable information concerning the financial situation of individual firms.
Without consistent information, investors are unable to consider in detail the risks and make considerations of the expected returns to investment opportunities. The cost of capital for companies will be higher, and many otherwise eye-catching investments will not take place (Schulz, Alison, p.vii).
One of the major tools for recuperating the quality of a trustful relationship with an investor in financial information is the implementation by the private sector of high-quality accounting and auditing standards. To fully succeed in reducing the cost linked with ambiguity, the acquired standards must present information that is as good as the international standards.
Financial markets are urbanized to facilitate the allotment of the scarcely available source of wealth to the best investment opportunities in a given economy. This requires considerable information regarding the set of investment opportunities, their likely returns, and the risks linked with each project.
Only with this information can projects be priced and investments allocated in an efficient manner. When the availability of information is not certain, or the information is not convincing, financial markets are incapable of operating efficiently. The cost of capital allocated to a specific project will be higher than necessary, and many otherwise acceptable projects will be rejected. Because of these information requirements, it is often said that financial markets live on the information.
One of the most outstanding scrutinies about the emerging markets is the lack of an essential and distinguishing attribute of information, inefficiencies in the allocation of investment resources, and the high cost of investment capital. If the region’s financial markets are to perform efficiently, it is important that financial disclosure be brought up to global standards. The region’s firms compete in the international market capital as they do for other inputs.
In this term paper, we’ll review the assessment of financial disclosure and analyze the decision-making challenges that arise when investors are faced with asymmetric information. It then discusses three major ways of reducing information problems: 1) the embracing of worldwide accounting principles and auditing standards, 2) the effectuation and ensuring observance of or obedience of these standards, and 3) the institution and enforcement of minimum disclosure requirements based on global standards. We will also review information problems that contributed to financial crises and had to be addressed to resolve or improve disclosure and increase the value of the firm.
Definition of financial Disclosure
It is important to put forth several definitions of financial disclosure. First, financial disclosure is defined as a copy of a printed economic information work, expressible as a quantity relating to a firm, that supports the making of investment decisions.
Economic information is any item of factual information derived from measurement or research that lessens the state of being unsure about the result of future financial events. Finally, improved disclosure demands a change resulting in an increase in the quantity and quality of economic information revealed or exposed by a firm by using its financial statements. The connection between improved disclosure and a well-functioning financial market is represented by the sketch below (Schulz, Alison, p.22).
The subsequent discussion points out that a well-functioning financial market depends on the securities trades that are in volume and from various capitalist groups. In such markets, assets in the form of money are in large quantities and economically supplied to firms showing the possibility of achievement or excellence to make the best use of them. The cost and availability of funds are, consecutively, the outcomes of investment decisions that, if they are to be sensible, must be based on the information used. Furthermore, the quality of investment decisions depends on the quantity and quality of the information provided. The relationship between improved financial disclosure and well-functioning financial markets is clearly or explicitly stated by the outcome of improved disclosure on a firm’s capital costs. That condition begins with an argument of the investment decision procedure and the result of improved disclosure on those decisions.
The Value of Financial Disclosure
The many-sided development institutions have long backed enhanced disclosure of macroeconomic information by the issuing economies and improved disclosure of financial mediators in an effort to enforce market discipline and limit banking crises.
Nevertheless, improved disclosure stays on the cutting edge of development needs. The discharge of well-timed and correct data is the importance of financial stability. As rising economies are supplementarily incorporated into international markets, the need for financial and economic disclosure will become even more vital. Moreover, the call for disclosure will exaggerate beyond government-issued macroeconomic figures to take in disclosure of private financial data, prices in the market, trading movements, company-specific financial information, risk exposures, and management strategies.
The confidential sector will take an increasingly lively role in contributing to the progress or growth of an improved information environment. An innovative concept for financial disclosure is required, one that recognizes the relationship among governments, private firms, the providers of investment capital, and the capital markets.
This innovative concept is reflected in current changes in the future financial markets, the growth of pension funds and other institutional investors, and the related development of equity, bond, commodity, and derivatives markets. These information-dependent markets and institutions are the front line of a region-wide change from the bank-cantered systems that controlled financial markets.
More complete, deep, and liquid capital markets offer superior quality of being variable on matching investment needs with existing funds. Organizations with access to these markets are able to choose and follow the capital formation that they observe to be most advantageous. These firms are able to use markets to avoid risks and, and in the process, lower their cost of capital.
On the other hand, access to these markets relies on information. Only those firms that are able to offer satisfactory quantities of convincing financial information will gain access to markets. Moreover, the apparent quality of information is a function not only of the information provided by individual firms but also of the information environment in which a firm carries out its activities.
The importance of being outside is created from the financial system’s efforts to meliorate the quality of investor information. The creation of information-rich markets, as required by a modern information environment, will need a lengthened or extended effort by up-and-coming economies. Nevertheless, to be successful, information disclosure must be at a position equivalent to that obtainable or accessible internationally.
Three factors will be given due consideration. First, private sector investors will need to be familiar with the significance of improved disclosure and be prepared to supply information to the public. Second, countries will need to develop their accounting and auditing monetary standards, bringing them in proportion to international standards. Third, securities exchange commissions in the county will need to build up their ability to keep an eye on and put into effect information disclosure rules and accounting standards to guarantee market transparency.
The Role of Information
Financial markets require effective and efficient information. Markets make steady progress on information, and individuals who have contact to better information or who are able to read between the lines of available information more quickly or more precisely will have a relative quality of having a superior or more favorable position in their investment decision. This produces an extraordinarily large demand for information and information processing.
There is, similarly a strong psychological feature that arouses an organism for firms to provide messages received to potential shareholders in order to reduce the variance in the approximated value of the firm and reduce the cost of capital for the firm. Those firms that are able to offer better, more believable information will be rewarded in financial markets, while those that provide more difficult information will be compelled to pay a higher cost of capital or maybe barred altogether from financial markets.
The Role of Asymmetric Information
Risks associated with each investment possibility due to a favorable combination of circumstances can be thought of as the sharing of outcomes and their related probabilities. Unfortunately, this spreading or apportioning is never known with any degree of assurance because it depends on factors as clearly dissimilar as the current or potential value of a firm’s assets based on how well they are used.
The individuals with access to the best message received and understood about the value and risk associated with investment possibility due to a favorable combination of circumstances are often insiders who, due to likely disagreements of interest, may not be perceived as fully credible.
This information imbalance is a critical problem for financial markets. If information cannot interchange information or ideas in a credible fashion, then, market incentives will have an intended meaning altered or misrepresented and investment will decrease. In some cases, encouraging net present value investments will not be made because the inherent capacity for coming investors will not be enthusiastic to provide funds. When the information asymmetries are not adequately served, markets fail altogether.
Adopting Global Accounting Principles and Auditing Standards
The most vital tool for cutting down on the gap between claimed and perceived value is to develop accounting maxims and auditing standards. Although the accounting model is the necessary abstraction of a firm’s true value, when the basis for comparison is well known and constantly applied, the investment center of the population is able to understand properly the financial position of the firm.
If a firm would wish to come into possession of the benefits of a contemporary information environment, they must inform investors positively, with certainty and confidence that their discovery standards are equivalent, if not identical, to global standards. Any variation that deviates from these standards will increase the state of being unsure of something within the investment community and thwart firms from realizing the potentially lower cost of capital.
As the pace of globalization hastens, companies, investors, regulators, and auditors alike recognize the merits of improving financial disclosure. Demand for accurate financial information is stimulated by the need to raise capital in overseas markets, vary in order to spread or to expand investment options, ensure the safety and soundness of domestic financial markets, and prepare audit financial statements.
These activities bring into existence a strong interest in developing and employing globally tolerable accounting standards to provide meaningful, conforming in every respect, and dependable financial and economic information on enterprises.
Adopting Globally Compatible Disclosure Requirements
The adoption and the act of accomplishing some aim or executing some order of globally accepted accounting standards are only the first steps in the creation of an enabling information environment. Global standards provide consistent rules that improve the ability of boards of directors and senior management to manage a firm. When presented to the market, increased or intensified in value or beauty or quality information also enables exterior financial analysts to make sense of; assign a meaning to the financial information they use to recommend investments or the extension of credit.
For those decisions to be effective, the information must be made publicly available. It is not sufficient that management, regulators, or rating agencies have access to complete information. The information must be available to the markets, to current and potential investors, to current and potential creditors, and to others who use financial information to make important decisions with respect to the firm.
Although there is an important line between information owned by the firm and others whose disclosure might hurt a firm’s competitive position in general, the requirements for information disclosure in Latin America and the Caribbean are well below global standards.
Financial Information via Enterprise Statements
Disclosure of information, via published reports, is imperative for financial markets to meet their acknowledged economic functions effectively. In its absence, investors would have to resort to indirect means of acquiring data regarding a firm’s financial performance. There would then exist the strong possibility that security investors would buy and sell on the basis of rumor, guesswork, or the tactics of market manipulators rather than on the substantive capacities of security issuers.
Alternatively, they will not invest at all. If securities are not valued on the basis of the capitalized value of a company’s expected return streams, it is unlikely that investors will be in a position to distinguish rationally between potentially successful and potentially unsuccessful firms. If this situation prevails, then only by chance will capital funds be channeled to their most productive employees?
Financial Disclosure and the Development of Broadly Based Financial Markets
We have established that the institutional requirements of financial markets are premised on the notion that an efficient capital market is dependent on a well-informed investor. However, the activities of capital market institutions indicate that they are interested not only in securing a given amount of information for investors but also in increasing the quantity and quality of information whenever possible. Part of the reason is that financial markets are dynamic. The fortunes of business enterprises are constantly changing. Updated information is required because the quality of securities is dependent on appraisals of company fortunes in the future.
There is another reason for seeking improved financial disclosure. Implicit in this viewpoint is the conviction that the performance of capital markets, in terms of access and cost, will improve if corporate disclosure improves.
Investment Decision making
To conceptualize investor decisions in an uncertain world, this section sets forth several assumptions describing the perceptions and attitudes of security investors towards choices involving risk (Sharpe, 1985)
- The investor values security on the basis of expected dividends
- Because of uncertainty, the investor sees these returns as expected values of the subjective probability distributions he forecasts
- Returns from acquiring a share stock are viewed as a combination of the periodic dividends
- Whatever variance of the conditional distribution of dividends given income is, and whatever it is a function of, the distribution of dividends will become less disperse as the distribution of expected income becomes less disperse.
- The investor uses some measure of the dispersion of a security’s expected returns, that is, the standard deviation of expected dividends
- Investors generally prefer a higher expected return for any given level of risk and a lower level of risk for any given expected return
- Because the liquidating value of a security is functionally related to expected dividends beyond the holding period, a security’s returns are ultimately a function of future dividends
- The distribution of expected dividends is dependent on the distribution of the firm’s expected income stream
It is argued that a well-functioning financial market depends on trades in securities that are in volume and from diverse investor groups. In such markets, funds are abundantly and cheaply supplied to firms promising to make the best use of them. The cost and availability of funds are, in turn, the outcomes of investment decisions that, if they are to be rational, must be based on the information used. Moreover, the quality of investment decisions depends on the quantity and quality of the information provided. The relationship between improved financial disclosure and well-functioning financial markets is specified via the effect of improved disclosure on a firm’s capital costs. That specification begins with a discussion of the investment decision process and the effect of improved disclosure on those decisions.
The impact of The Sarbanes–Oxley Act on the stock market
The Sarbanes-Oxley Act of 2002(P.L.107-204) was enacted in reply to the high level or degree of fraud at Enron and a long list of other U.S corporations. The law wanted to advance or reinstate the potency of gatekeepers who are expected to ensure that investors receive accurate information about firms whose security is traded in public markets. Corporate executives, directors, auditors, accountants, attorneys and regulators are all held to more stringent standards of accountability under Sarbanes-Oxley.
The main reason, plan or objective of the Sarbanes-Oxley Act of 2002 was to advance the fidelity of the financial statements of firms. The Act entails that a firm or an organization should put in place an internal organized method in place at least one year prior to going public. This essential condition has advanced the quality of financial reporting. Since its enactment, investors have prepared their opinion or judgment grounded on financial information rather than publicity. Long-term downward corrections that were common in the late 1990s by IPO shares have not been experienced either since its enactment (Madura, Jeff. P. 240).
According to the Sarbanes-Oxley Act 2002, regulators, public companies, audit firms and investors generally agree that it had a positive and significant impact on investor protection and confidence,(Plette, 2009, p. viii)
It was noted that the cost associated with complying with the act, along with other markets factors, maybe encouraging some companies to become private.
Conclusion
The creation of an information environment is part of a virtuous cycle of growth and a state in which things are improving. The accessibility of high-quality, timely, and capable of being believed financial information is something that is required in advance to the development of liquid and deep financial and capital markets, which leads to a lowering of the cost of capital, the possibility of more optimal capital structures, and eventually higher levels of investment. This, in turn, leads to higher levels of economic growth and new types of markets and innovations, all of which have new information requirements. The cycle repeats itself as investors and firms together continue to exploit the synergies associated with reducing information asymmetric.
Firms need better access to capital markets. They need to improve their ability to manage risks. This ability to manage risk and access capital markets is premised on a functioning information environment that is based on disclosure requirements set at international levels. Achieving this will require firms, other market participants, and government policymakers to recognize that they will have to work together.
In a practical sense, it is difficult to separate the issue of financial disclosure from the issue of accounting measurements. In the absence of disclosure, accounting measurements serve no useful purpose. Yet, disclosure cannot take place until the information has been developed. Thus financial disclosure and accounting measurement are intertwined and give corporate financial reporting its substance.
References
Madura, Jeff. Financial markets and institutions. Mason, OH: Cengage Learning, (2008). Print.
Plette, Theodore N. The Sarbanes-Oxley Act: implementation, significance, and impact. New York, NY: Nova Publishers (2008). Print.
Schulz, Alison. Financial disclosure: the first step to financial market development. Inter-American Development Bank. New York: NY. (1999) Print.
Sharpe, Wiliam F. Investment. Englewood Cliffs, N.J.: Prentice-Hall. 1985. Print.
Sindell, Kathleen. Investing online for dummies. For Dummies. Indianapolis. (2005). Print.