Issues of the Financial Disclosure

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Introduction

Financial disclosure is defined as the deliberate misrepresentation of the financial position of a business entity resulting from omission, disclosure, or misstatement of financial reports. It is done in an attempt to deceive or mislead stakeholders. Financial disclosure amounts to accounting abuse and fraud within organizations. Financial misrepresentation is linked to management fraud since it is the managements’ responsibility to ensure financial reporting is carried out to satisfy relevant stakeholders. Financial reporting is useful to shareholders, employees, debtors, and creditors. If they are doctored, issues about loss of confidence arise. Companies equally lose credibility within the markets and industries they operate in (Belkaoui 2004, p.224).

Financial disclosure fraud takes many different forms. It may occur in exaggerating revenues, concealing losses, liabilities, and expenses, covering up related party transactions, improper asset valuation (resulting from poor estimation), and failure to disclose related party transactions. The most common is overstating company revenues and profits to depict that the company is doing well. Understatement of revenue is done by companies to reduce their tax liability. Financial disclosure issues arise due to several reasons. However, early awareness through detection of warning signs can be instrumental in guarding the firm against fraud and possible collapse in the long run (Nikolai, Bazley& Jones 2010, p.341).

Financial disclosure issues

Financial disclosure issues occur due to moral decay, ethical dilemmas, greed, and pressure to perform and remain relevant in markets in which entities operate. It gives a false justification which makes the act committed seem right as long as it protects the interests of the firm in the eyes of stakeholders (Saudagaran 2009, p.23).

These issues may also be a result of market pressures to perform and boost investor confidence. Financial disclosure issues force management to commit the same act for subsequent years hence making it recurrent. This implies that all forms of reporting will be falsified and this hides the true financial position of the firm in terms of profits and revenues. The reasons leading to financial disclosure issues are discussed below.

Obtaining financing from lenders

Directors may falsify financial reporting for building ‘flowery’ portfolios and impressive cash flows. In this case, possible lenders provide financing based on revenue, profits, assets, and liabilities reported. If the company demonstrates upward growth and performance is favorable, it can obtain funding to undertake any investments they desire.

Greed and personal motives

Sometimes management and directors use company finances to advance their interests and engage in malicious dealings. Directors may engage in gambling and personal investments which they finance using company money. Misuse of funds is usually driven by the fact that the management or directors want to make quick money in the shortest time possible. If the directors use business funds, they should report this in proper books of accounts by posting debits and corresponding credits. Some members of management may engage in corruption to attain monetary gratification through questionable transactions which they do not reflect in financial reports.

Related party transactions

Company directors may fail to disclose accurate financial information if they want to protect the interests of another company. Usually, related parties do not have a good standing in the market or are involved in fraudulent transactions which may taint the image of the firm. Related parties also refer to firms that are owned by some of the directors that have been given business by the parent firm, meaning that funds are channeled there. This is a possible indication of a conflict of interest.

Tax evasion

Tax evasion refers to efforts by management and directors to illegally avoid paying taxes. This is done by false or inaccurate reporting and in some cases failing to report. Most company directors engage in wrongful reporting to evade tax regulations and obligations. Companies cleverly do this by exaggerating expenses incurred within the firm while reducing revenue (Fredrick 2003, p.27).

Boosting Investor Confidence

Directors misrepresent financial information to give a false perception to investors and stakeholders. They also do this to dispel market fears to paint a good picture of the firms’ performance in their markets and industries. The motive behind this is to ensure that they maintain attract a favorable number of investors who are willing to inject or invest capital in their firms to ensure they stay in business.

Warning signs of financial disclosure issues

Warning signs provide indications of disclosure issues within business entities.

If these signs are noted, it is the responsibility of management to ensure that they follow up on such matters. Some of the common signs include consistent late reporting of financial positions, inexperienced accountants, and poor control or monitoring in business environments. Another common sign is managerial pressures on subordinates to the extent that management assumes the roles of subordinates. If management is comprised of several individuals, disclosure issues may arise. Managers who equally place too much weight on profit generation are likely to doctor financial reports.

Solutions to Financial disclosure issues

The bottom line is to enforce integrity and moral values within the firm. This ensures that organizational culture is inculcated based on truth, honesty, and objectivity. Management should engage in training programs to continuously sharpen the skills of their accountants and ensure that they comply with industry norms and standards. External audits must be conducted to ensure that there is no deviation in figures from internal audits previously conducted.

It is important to establish independent structures within the firm that are responsible for oversight control and monitoring senior management performance in financial reporting. Furthermore, appropriate reporting structures must be put in place to address such issues in the firm. Compliance measures in reporting must be defined with a subsequent disciplinary action in the event of a violation of the same. Corporate strategy must be integrated with acceptable accounting procedures (Carmichael, Whittington & Graham 2012, p.42).

Conclusion

Despite placing the burden of financial disclosure on directors and management, external checks must be organized to ensure high levels of accuracy in financial reporting. Firms need to be aware of warning signs and stipulate standards that must be adhered to within the firm to ensure credibility in financial reporting. Adequate financial reporting protects the interests of stakeholders and prospective investors and ensures that the company operates as per required industry standards. The firm should engage a top-down approach to ensure management responsibility trickles down to employees hence decentralizing accountability and ensuring that all employees are conversant with the need to exercise due diligence in all their financial reporting responsibilities.

References

Belkaoui, A.R 2004, Accounting Theory, Cengage Learning, USA.

Carmichael, D. R, Whittington, O.R & Graham, L 2012, Accountants’ Handbook, Financial Accounting and General Topics, John Wiley and Sons, New Jersey.

Fredrick, C 2003, International Finance and Accounting Handbook, John Wiley and Sons, New Jersey.

Nikolai, L.A, Bazley, J.D & Jones, J.P 2010, Intermediate Accounting, Cengage Learning, USA.

Saudagaran, S 2009, International Accounting: A User Perspective, CCH Group, USA.

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