Financial statement disclosures help investors make economic decisions about firms.
Financial statement disclosures help regulators, investors and the general public learn about important developments in a company's activities, internal controls or processes and top leadership's decisions. Disclosures also help investors understand significant economic trends and business indicators in a firm's industry, and could be voluntary or required by regulatory and statutory authorities.
SEC Requirements
The Securities and Exchange Commission (SEC) requires a company listed---or operating---on a US financial market to file quarterly and annual disclosures. Such disclosures are available to investors or the general public and are usually non-financial. A corporation must reveal changes among its top management team---including the board of directors, relationships between external auditors and executive officers, additional services these auditors perform, insider-trading activities and other important developments. For example, a company could file an SEC disclosure outlining the number of shares a director bought during the previous three months.
SOX Disclosures
The Sarbanes-Oxley Act---also known as SOX---is a business law that requires a company's leadership to certify periodically---quarterly or annually---that internal procedures, policies and guidelines around "key" financial controls are adequate and operating effectively. A control is a mechanism put into place to prevent losses or technology malfunction; it is "key" to a process if such a process cannot function without it. A control is adequate if it details procedures for job performance and employee responsibilities at the segment level. SOX also requires an external auditor to review internal controls around financial reporting and issue an opinion on management's certifications.
Mandatory Disclosures
Generally accepted accounting standards require a corporation to present fair---that is, accurate and objective---and complete financial reports and include additional information about account balances. Complete reports include four types of summaries: a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of owners' capital. These reports provide investors with a firm's operating data and business trends. For instance, a balance sheet listing corporate assets and liabilities could report pending lawsuits by explaining amounts included in the "legal reserves" account balances. A firm also could indicate in its cash flow statement different sources of funding for operating, investing and financing activities.
Statutory Disclosures
A company operating under statutory standards---such as a bank, a hedge fund or an insurance company---could include additional information in the financial statements or management disclosures to inform investors about regulatory developments. For example, a Utah-based investment bank operating under Federal Reserve statutes might include Tier 1 capital ratio calculations and assumptions in the financial disclosures.
Voluntary Disclosures
A company could voluntarily reveal important developments in its activities by including a "Management Discussions and Analysis" section in regulatory filings. In this section, the firm's managers could inform investors about upcoming reorganization initiatives---such as mergers or acquisitions, industry trends, regulatory changes and top management long-term strategies.
