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.
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.
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.
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.
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.
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.
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:
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.
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