If you’re relatively new to the business world (maybe even if you’re not), the concept of mandatory disclosures in financial statements can feel unexciting at best (ambiguous and overwhelming at worst). Search the term online and you’re likely to find plenty of results about the importance of mandatory disclosures as a part of fair and legal divorce proceedings or when selling a house, for example.
In the business world, mandatory disclosure closely relates to the general practice of disclosure management, which requires public companies to prepare different types of disclosures in financial statements. In this blog, we’ll take a high-level look at the most common types of mandatory disclosure requirements and explain the importance of disclosures in financial statements.
What Is a Mandatory Disclosure Policy?
The mandatory disclosure policy delineates the guidelines specifying which details ought to be documented as transactions and which should be excluded from the accounting system.
Why Do You Need to Make Necessary Disclosures in Financial Statements?
Simply put, you need to make necessary disclosures in financial statements because they’re necessary disclosures. What makes them so important, though, as to make accurate disclosures mandatory? It largely comes down to the difference between privately-owned and publicly-owned companies. While privately-owned businesses aren’t required by law to disclose details of their finances and operations, public companies are required to disclose several different types of information concerning their financial picture, business operations and outcomes, management compensation, and more.
These disclosures provide key stakeholders, both internal and external, with accurate and up-to-date information about public companies’ financial operations. As a general rule of thumb, disclosure management for small companies is less intensive than the disclosure requirements for corporations and larger companies. For larger companies, this crucial information is especially important to lenders and investors.
Who Monitors and Enforces Mandatory Disclosure Laws and Regulations?
As the federal agency tasked with enforcing laws against market manipulation and other unsavory financial tactics, the U.S. Securities and Exchange Commission (SEC) is primarily responsible for monitoring and enforcing mandatory disclosures.
As far as enforcement goes, it’s worth noting that “all of the SEC's disclosure requirements have statutory authority,” meaning the rules and regulations around mandatory disclosure are subject to change. You can always keep up to date on the SEC disclosure requirements for public companies by checking the SEC’s Disclosure Guidance homepage.
Companies that operate outside of the U.S. will need to consult those jurisdictions’ requirements—the European Securities and Markets Authority (within the European Union), or Canadian Securities Administrators (in Canada), for example.
What Is Disclosure Management?
Disclosure management is simply the process of collecting all of the necessary financial information and compiling reports in compliance with mandatory disclosure requirements.
One key component of disclosure management relates to the creation of annual and quarterly reports, as well as additional reports when specific events occur. Disclosure management, then, involves preparing and filing Forms 10-K, 10-Q, and 8-K, respectively.
- Form 10-K: This annual report form is meant to provide a comprehensive overview of the company's financial performance and standing. Among other things, submission of this form requires the inclusion of audited financial statements.
- Form 10-Q: This quarterly report form is similar to the annual report, and its filing is required for each of the first three quarters of the company’s fiscal year. Unlike the more comprehensive 10-K form, the 10-Q requires less detailed information, and unaudited financial statements are sufficient.
- Form 8-K: This current report form is a sort of catch-all for items that aren’t necessarily accounted for in the other report types. Rather than being required on an annual or quarterly basis, Form 8-K is required within four days of certain specific events that occur, such as:
- Bankruptcies
- Incurrence of new material debt(s)
- Major changes to fundamental business practices or policies
- Elections (or departures) of key executives
- Acquisition of (or by) another company
- Other events of note to shareholders, which can be reviewed in more detail here.
Here, it’s worth mentioning that these forms only apply to the U.S. For companies that operate globally, you’ll need to consult those locations’ mandatory disclosure requirements. For example, Canada and the EU have each set out their own standards that require compliance.
What Is Compliance with Mandatory Disclosure, and What Tools Can Help?
Compliance with mandatory disclosure requirements simply means filing the appropriate paperwork within the appropriate timeframe and with up-to-date, accurate information. This can be challenging without the right tools. Not only can the processes of collecting and verifying the required information be exhausting and time-consuming, the very-real possibility of human error can cost a business through fines or other consequences.
The right tools—like Fluence’s Disclosure Management (powered by Sturnis365)—makes reporting easier, quicker, and less likely to contain errors or outdated information. Not only that, but our powerful platform also empowers teams with tools for:
- Facilitating collaboration across the different roles and departments impacted by mandated disclosures in reporting.
- Creating traceability and auditability through version control, so it’s easy to see where, how, and when documents have been updated.
- Reducing reporting errors by automatically checking for consistency within and across different reports, keeping data up to date.
- Streamlining processes and eliminating duplication of efforts by making information accessible in different formats and document types, reducing common barriers for collaboration.
While other tools might claim similar features and benefits, ours was built differently. It was built to be intuitive and efficient, with an interface that integrates naturally into familiar productivity software applications (like Office 365).
From initial data collection and validation through consolidation and distribution, our Fluence Disclosure Management automates much of the process, meaning better, quicker financial reporting. Contact us today to learn more, ask questions, or take the first step toward a better reporting experience by scheduling a demo.
