Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-23T07:31:30.440Z Has data issue: false hasContentIssue false
  • English
  • Français

Qualitative Financial Statement Disclosures: Legal and Ethical Considerations

Published online by Cambridge University Press:  23 January 2015

William E. Shafer
Get access Rights & Permissions [Opens in a new window]

Abstract:

There is a long-running debate among legal scholars regarding the propriety and enforceability of SEC attempts to mandate disclosures of antisocial or illegal corporate activities that do not materially impact a company’s financial statements. This debate was recently revived by the issuance of SEC Staff Accounting Bulletin 99, Materiality in Financial Statements (SEC 1999), which suggests that quantitatively immaterial information relating to unlawful transactions or regulatory non-compliance should be considered for disclosure. This issue has important implications for the accounting profession, although it has generally been ignored in the accounting literature. This paper reviews legal and ethical considerations raised by the issue of qualitative disclosures, and also presents the results of a preliminary empirical test of the impact of such disclosures on financial statement users’ judgments. The results of this study indicate that investors consider the nondisclosure of immaterial illegal acts to be unethical, and reject suggestions that such information lacks moral intensity. The results also suggest that immaterial illegal acts have a significant effect on investors’ perceptions of the quality of corporate management and the likelihood of investment in a company. This effect was more pronounced when the illegal act was combined with self-dealing on the part of corporate executives.

Type
Articles
Information
Business Ethics Quarterly , Volume 14 , Issue 3 , July 2004 , pp. 433 - 451
Copyright
Copyright © Society for Business Ethics 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

American Institute of Certified Public Accountants (AICPA). 2001. Professional Standards, Volume 1. New York: AICPA.Google Scholar
Cary, W. L. 1974. “Federalism and Corporate Law: Reflections Upon Delaware.” The Yale Law Journal 83: 663–702.Google Scholar
DeChow, P. M., and Skinner, D. J.. 2000. “Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators.” Accounting Horizons 14(2): 235–50.Google Scholar
Fang, K. C., and Jacobs, B.. 2000. “Clarifying and Protecting Materiality Standards in Financial Statements: A Review of SEC Staff Accounting Bulletin 99.” The Business Lawyer 55 (May): 1039–64.Google Scholar
Fedders, J. M. 1998. “Qualitative Materiality: The Birth, Struggles, and Demise of an Unworkable Standard.” Catholic University Law Review 48: 41–84.Google Scholar
Freeman, M. V. 1976. “The Legality Of The SEC’s Management Fraud Program.” The Business Lawyer 31: 1295–1303.Google Scholar
Gaines v. Haughton, 645 F.2d 761 (1981).Google Scholar
Healy, P. M., and Wahlen, J. M.. 1999. “A Review of the Earnings Management Literature and Its Implications for Standard Setting.” Accounting Horizons 13(4): 365–83.Google Scholar
Hunt, S. D., and Vitell, S.. 1986. “A General Theory of Marketing Ethics.” Journal of Macromarketing 6: 5–16.Google Scholar
Jones, T. M. 1991. “Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model.” Academy of Management Review 16(2): 366–95.Google Scholar
Kripke, H. 1981. “The SEC, Corporate Governance, and the Real Issues.” The Business Lawyer 36: 173–206.Google Scholar
Levitt, A., 1998. “The Numbers Game.” Speech delivered at New York University. Available at www.sec.gov/news/speech/speecharchive/1998/spch220.txt.Google Scholar
Libby, R., and Kinney, W. R. Jr. 2000. “Does Mandated Audit Communication Reduce Opportunistic Corrections to Manage Earnings to Forecasts?” The Accounting Review 75(4): 383–404.Google Scholar
Longstreth, B. 1983. “SEC Disclosure Policy Regarding Management Integrity.” The Business Lawyer 38: 1413–28.Google Scholar
Maldonado v. Flynn, 597 F.2d 789 (1979).Google Scholar
McLucas, W. R., Lewis, M. B., and Angotti, A. M.. 1996. “Common Sense, Flexibility, and Enforcement of the Federal Securities Laws.” The Business Lawyer 51: 1221–39.Google Scholar
Miller, G. F. 2000. “Staff Accounting Bulletin No. 99: Another Ill-advised Foray into the Murky World of Qualitative Materiality.” Northwestern University Law Review 95: 361–406.Google Scholar
Pitt, H. L., Birenbaum, D. E., Hardison, D. B., Johnson, D. L., and Westerfeldt, R. C.. 1999. “The SEC’s New Materiality Pronouncement: Materiality by Hindsight?” The Corporate & Securities Law Advisor 13(9): 32–3.Google Scholar
Securities and Exchange Commission (SEC). 1974. Securities Act Release No. 5466, SEC Docket 648.Google Scholar
Securities and Exchange Commission (SEC). 1999. Materiality in Financial Statements: SEC Staff Accounting Bulletin 99. Washington, D.C.: SEC.Google Scholar
Shafer, W. E., Morris, R. M., and Ketchand, A. A.. 1999. “The Effects of Formal Sanctions on Auditor Independence.” Auditing: A Journal of Practice & Theory 18 (Supplement): 85–101.Google Scholar
Treviño, L. K.. 1986. “Ethical Decision Making in Organizations: A Person-Situation Interactionist Model.” Academy of Management Review 11(3): 601–17.Google Scholar
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).Google Scholar