Disclosure is a process of making all relevant information about a business available to the public in a timely manner. This information can play a pivotal role in making decision by a particular investor. Disclosure implies that all sides have equal access to the same number of facts in the interests of fairness.
What is Disclosure
A system in which one or more categories of government officials in a certain country are needed to disclose data about their property and/or commercial activities is called disclosure of financial and business interests.
Disclosure of public officials’ interests is a strong instrument, which have two reasons. Firstly, it is a transparency mechanism which boosts public officials’ accountability, ensures public decision-making is not subject to conflicts of interest, and can increase trust in public authorities. Secondly, it is a tool which can provide information and proof for the investigation and prosecution of corruption.
The government agency regulating financial markets and protecting the investors is the Securities and Exchange Commission (SEC), which was created in 1934. Its disclosure requirements must be complied with by all companies listed on the US stock exchanges.
After the stock market crash in 1929 and the Great Depression, two laws were passed to regulate disclosure by the federal government: the Securities Act of 1933 and the Stock Exchange Act of 1934.
Another law in this area has become the Sarbanes-Oxley act (SOX), which was passed in 2002 as a consequence of the scandals over the reporting of some companies. George W. Bush called SOX “the most radical reform of the business practices of American companies since Franklin Roosevelt”.
The adoption of stringent reporting requirements for the actions of managers, directors and auditors, the introduction of criminal penalties for misleading investors helped to survive the crisis and restore the confidence of users of financial statements in the United States.
Some insiders may use important non-public information for personal gain, but all investors should have equal opportunities. That is why the SEC clear requirements for disclosure are also needed.
An identification of the significant information carrier is an important point in countering the use of insider information.
It is generally recognized that the securities market should be competitive, transparent and honest, and investors should be on an equal footing. The use of insider information is considered one of the ways to manipulate prices. In most countries of the world, such operations are considered not only illegal, but also criminally punishable.
According to the SEC requirements, publicly traded companies must prepare two annual disclosure reports, for the SEC itself and for the company's shareholders. The annual report on form 10-K provides a comprehensive overview of the company's business and financial condition and includes audited financial statements. It is important to notice that any significant changes must be promptly reflected in this report.
Disclosure documents can include quarterly and annual financial statements, prospectuses, management information circulars and management’s discussion and analysis (MD&A). When a company goes public, it must disclose information that includes a prospectus containing material information.
Example of Disclosure
Business can be affected by operational details, positive and negative news. Publishing its forecast values, a company cannot predict any events in many cases, such as a global spread of a new virus, which can have a significant impact on the real company's business.
Because of the coronavirus pandemic, the SEC has recommended all public traded companies make appropriate disclosures to their stockholders about how the crisis will affect their future operations and financial results.
Many companies have followed these guidelines. Consumer goods companies have warned of the threat of income loss due to the disruption of supply chains from China and the slowdown in retail sales, canceling their previous forecasts.