Regulation Fair Disclosure

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

financial statements” (Waxman, 2013, p. xiii). It is the purpose of this paper to discuss some of

TL;DR - The FTC wants affiliates to to disclose their incentive-based relationships to their audience in a "clear and conspicuous" manner. Something to consider for BlackFriday.com

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When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

Baruch Lev and Feng Gu authors of “The End of Accounting and The Path Forward for Investors and Managers” indicate that over the past 110 years, the structure and content of financial reports has not changed, and that the role that these reports play in influencing the decisions of investors has greatly diminished. Lev and Gu make a case that non-transaction events that are not captured by the financial reports such as those disclosed through 8-k filings with the Securities and Exchange Commission (“SEC”) have a greater impact on stock prices, and thus more useful to investors. In addition, they suggest that one of reasons for the decline in usefulness of financial reports stems from the increase of estimates that has made its way into these reports (Lev and Gu 2016).

The idea that mandatory disclosure laws would combat wage discrimination was addressed in the Paycheck Fairness Act, a piece of legislation first introduced in 1997, which would not only amend the Equal Pay Act by increasing incentives to prevent discrimination in wages and account for loopholes, but it would also protect workers from punishment by employers for discussing wages. This bill was never passed. Although this bill would have taken steps to protect workers right to transparency in wage disclosure, there must be more actions taken in the form of mandatory disclosure laws. Another bill that was never passed that would help to protect employees from being punished in disclosing wages is the Fair Pay Act (Hill, 2017). This bill would protect

The research shows that the earnings announcements of firms within an industry can impact the share prices of other firms in the same industry. This effect has been labelled as the ‘information transfer effect’. The ‘information transfer effect’ highlights the belief that share prices react to public information emanating from various sources—including

In the underlying paper the author re-examines the conservatism principle and its asymmetric effects on earnings. With samples consisting of all firm-year observations from 1963 to 1990 with returns data on the CRSP NYSE/AMEX Monthly files and respective accounting data on the COMPUSTAT Annual Industrial and Research files, he formulates and tests four major hypotheses to find evidence for his predictions. At first he chracterizes “conservatism in accounting as the more timely recognition in earnings of bad news regarding future cash flows than good news”.1 In his first hypothesis he predicts a more sensitive response of earnings towards bad news in comparison to good news, proxied by negative and positve annual stock returns. His second prediction is that earnings are more timely than cash flow, indicating a stronger association of accruals to conservative accounting effects. Hypotheses three and four account for a test on the

The article discusses that in 1976 the U.S. Supreme Court ruled in one case that omitted financial statement information altering a reasonable investor’s decision proves the material nature of the information. The article continues by describing that lower courts earlier ruled that all financial information whether material or not must have full disclosure in a company’s financial statements. The rejection of the lower courts’ ruling by the U.S. Supreme Court gives the investor the ability to focus on the aspects of the financial statements that are most important by allowing the elimination of minute details (Sauer 2007, 317-357). In essence, this ruling allows for the elimination of financial information below the determined materiality threshold unless otherwise required by the ruling of a regulatory body.

As the scandals came to light, mistrust of financial reporting in general grew. One article in the Forbes magazine noted that “repeated disclosures about questionable accounting practices have bruised investors’ faith in the reliability of earnings reports, which in turn has sent stock prices tumbling” (Forbes). Imagine trying to carry on a business or invest money if you could not depend on the financial statements to be honestly prepared. Information would have no credibility. There is no doubt that a sound, well-functioning economy depends on accurate and dependable financial reporting. United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.

The essential mechanism of the legal framework which governs the performance and functioning of listed companies in any country is the laws and regulations determining the quantity and quality of corporate disclosures. The core of governance is transparency, disclosure, accountability and integrity.

The techniques of earnings management have already been discussed. However, what has not been touched in detail so far is how earnings management affects investors. It can be easy to fall into the trap of believing that all types of earnings management are bad.

The interest in accounting disclosure and audit quality by academics, practitioners, and regulators heightened following the various financial reporting scandals, and subsequent legislative and professional response to these scandals (e.g., ASX Corporate Governance Guide 2003; Sarbanes-Oxley Act 2002). An important question that has been on the minds of many is whether the implementation of stricter auditing standards such as those mandated

This paper analyzes current practices in several Latin American countries in the areas of corporate disclosure and transparency by focusing on the extent to which information is disclosed to investors through public channels, such as websites. We find weak disclosure practices, which will continue to prove problematic for capital flows and the future development of these countries. Specifically, poor disclosure practices lead to reluctance on the part of investors to invest in these companies, high costs of capital and poor valuations. Latin American firms should be encouraged to voluntarily increase disclosure, select independent boards, and enforce disciplinary