Corporate Disclosure and Financial Statements Essay Example

purpose of investigating and enhancing laws pertaining to Joint Stock Companies for safeguarding British citizens.

In 1844, the First Report was published with recommendations to improve corporate accountability. The report proposed holding regular meetings and auditing and publishing accounts, to make directors and officers more accountable to shareholders. It emphasized that honest and audited accounts would provide insights into a company's true state, and that improved remedies could hold those responsible for mismanagement legally accountable. The report also suggested making company accounts accessible for inspection by shareholders, along with registering the annual balance-sheet and auditors' reports. These recommendations marked the beginning of a continuous effort to ensure transparency in corporate affairs, and the establishment of modern accountancy and audit professions, as well as supervision by stock exchanges, central banks, and securities commissions.

The 1844 Report exposed various deceptive practices employed by these companies, such as issuing false statements in prospectuses and advertisements, living luxuriously to avoid suspicion, creating fraudulent accounts, declaring dividends based on false profit claims, and engaging in other forms of fraud. In response, the Joint Stock Companies Act 1844 was enacted.

This act established the Office of the Registrar of Joint Stock Companies and mandated that companies keep documentary information available for public inspection. It also required them to provide audited balance sheets and reports to shareholders, present them at annual meetings, and file them with the Registrar's Office. Additionally, shareholders were granted the right to examine their companies' accounting records. Subsequently in 1855, the Limited Liability Act was passed.

This legislation introduced general limited liability wherein shareholders would only be held accountable for company debts up to their invested share amount.

Simply put, if the company became bankrupt, their liability would be limited.

The requirement for companies to have "limited" or "ltd" in their name was established by the 1855 Act, which aimed to inform the company's creditors about its limited liability status. This legislation recognized companies as a key driver of economic development and led to the classification of businesses as incorporated companies or conventional partnerships. The number of incorporated companies steadily rose, particularly towards the late 19th century, reaching around 65,000 registered companies by 1914 and approximately 200,000 by 1945.

As early as 1877, institutions like The Economist advocated for implementing accounting standards for companies. This prompted various amendments and statutory enactments that culminated in the Companies (Consolidation) Act 1908. According to this act, companies were required to include a balance sheet in their annual return submitted to the Registrar of Companies. In the United States, corporate disclosure followed England's standards until the early 1900s when significant changes were introduced after the Great Depression of 1929.

The Securities Act of 1933, drafted by Felix Frankfurter and his team, was based on the English Companies Act of 1929. This act introduced two key elements to the American securities regulation regime: the concept of full disclosure and the possibility of civil liabilities for registrants, officers, directors, and experts. The 1929 Act not only had practical value but also reflected the vision of the nation's leadership at the time. President Roosevelt's policy emphasized full disclosure as the preferred solution to the issues in American financial markets, which can be best understood through Louis Brandeis's analogy of sunlight being the best disinfectant. By 1932, even the New York Stock

Exchange was concerned about the inconsistent accounting and reporting methods used by companies listed on its exchange. To address this, a committee chaired by George May from the American Institute of Accountants was appointed to develop improved accounting standards that could be enforced through listing requirements. The committee's final report had five recommendations.

In order to ensure consistency, corporations listing their stock on the exchanges were requested to follow specific accounting principles. However, within this framework, each firm had the freedom to choose its preferred accounting methods.

1. Each listed ompany would prepare a summary of accounting methods used in its statements.
2. This summary would be formally approved by the firm's board of directors, would be filed with the exchange, and would be available on request to any stockholder.
3. The procedures listed in this summary would be consistently followed from year to year and would not be changed without prior notice to the Stock Exchange and to the company's investors.
4. Financial statements were to be the representations of management. The auditor's task was to inform stockholders whether the methods dopted by each company were actually being used, whether they were compatible with "generally accepted" principles of accounting, and whether they were being applied consistently.

The committee recommended that an authoritative list of accounting principles be created by a qualified group consisting of accountants, lawyers, and corporate officials. This list would assist corporations in developing their own procedures. The committee had two main objectives: educating the public on the need for a variety of accounting methods and proposing ways to reduce this diversity and promote

the adoption of superior methods across the board. In 1938, the Haskins and Sells Foundation appointed three educators, T H Sanders from Harvard, H R Hatfield from Berkeley, and Underhill Moore from Yale Law School. Their task was to devise a code of accounting principles aimed at improving corporate accounting practices and enhancing the quality of financial reports issued to the public.

In the process of creating "A Statement of Accounting Principles," they interviewed accounting data makers and users, examined periodical literature, and analyzed laws, court decisions, and current corporate reports. Paton and Littleton's "An Introduction to Corporate Accounting Standards" (1940) was a significant publication in the advancement of universal accounting principles during this time. It served as a comprehensive guide for future developments in corporate financial disclosure practices over the following decades. Over the past fifty years, there has been further development and expansion of the financial reporting framework that originated in the 1930s and 40s, happening simultaneously in the United States and Great Britain.

The implementation of the Sarbanes-Oxley Act following the Enron collapse is an example of the continuous effort to improve disclosure standards. Although standardized financial statements cannot ensure proper institutional behavior, they provide stakeholders with a foundation for accessing timely and accurate information about an institution's actual state. The fundamental principles that drive the establishment of these standards are intended to offer stakeholders regular, comprehensive, and uniform information about an institution's condition.