Full Disclosure Principle Definition
As one of the principles in Generally Accepted Accounting Principles (GAAP), the Full Disclosure Principle requires that all situations, circumstances and events that are relevant to financial statement users have to be disclosed. In other words, all of a company’s financial records and transactions have to be available for viewing.
Full Disclosure Principle Example
The Full Disclosure Principle in financial reporting exists so that individuals, from potential investors to executives, can be made aware of the financial situation in which a company exists. Without the Full Disclosure Principle of GAAP, it is likely that companies and organizations would withhold information that could possibly shed negative light on their financial standing. A prime example of this occurred during the Enron scandal. In this case, particular individuals and investors argued that this principle was violated. It was also argued that Enron withheld and fabricated crucial information to investors that would have made a difference in how these individuals invested in the company.
Full Disclosure Principle Consequences
GAAP designed this principle to protect the safety businessmen and investors. As a result, there are consequences when companies fail to adhere to this rule. In addition to the consequence that investors can be mislead into making unintelligent decisions as a result of withholding financial information, the Securities and Exchange Commission (SEC) also maintains the right to penalize any misbehavior. A company can be fined millions of dollars for any discrepancies or misconduct involved with their financial statements or accounting information.
In one example of this, Worldcom was fined 750 million dollars for reporting inflated income to investors. However, Worldcom was responsible for over 2 billion dollars in financial damages. Therefore, while the financial penalty to Worldcom was substantial, the consequence to the investor was far greater. The penalty for Woldcom was 75 times greater than any previous penalty. Thus, the Worldcom example is showing that the full disclosure principle is intact to prevent nasty consequences from occurring to both companies and the individual investor.
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