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UBC Theses and Dissertations

A consideration of corporate disclosure from the global viewpoint Teoh, Hai Yap 1971

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1 A CONSIDERATION OF CORPORATE DISCLOSURE FROM THE GLOBAL VIEWPOINT by TEOH HAI YAP B.A.(Econ.) i U n i v e r s i t y of Malaya, 1967 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In t h e F a c u l t y of Graduate S t u d i e s We accept t h i s t h e s i s as conforming to the Required s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA December, 1971 In presenting t h i s thesis i n p a r t i a l fulfilment of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t freely available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Commerce and B u s i n e s s A d m i n i s t r a t i o n Department of The University of B r i t i s h Columbia Vancouver 8, Canada D a t e December I O t h , 1971 ABSTRACT I n t e r e s t i n the question of adequate corporate d i s c l o s u r e has never been greater than i n recent years. Among the f a c t o r s c o n t r i b u t i n g to t h i s i n c r e a s e i n i n t e r e s t are the postwar trend of c o r p o r a t i o n s to develop i n t o the more complex conglomerates, the growing p a r t i c i p a t i o n of i n s t i t u t i o n a l i n v e s t o r s and the r i s i n g r o l e of the f i n a n c i a l a n a l y s t s . The i n s t i t u t i o n a l i n v e s t o r s , f i n a n c i a l a n a l y s t s , other shareholder groups, employees, c r e d i t g r a n t o r s , p r o f e s s i o n a l o r g a n i s a t i o n s , S e c u r i t i e s and Exchange Commissions, as w e l l as ot h e r s , are i n t e r e s t e d i n d i s c l o -sure on a more d i s a g g r e g a t i v e b a s i s by c o r p o r a t i o n s to meet t h e i r d i v e r s e and sometimes ov e r l a p p i n g needs f o r i n f o r m a t i o n . The r a t i o n a l e of adequate corporate d i s c l o -sure i s examined from the viewpoints of these d i f f e r e n t p a r t i e s at i n t e r e s t . A r e l a t e d c o n s i d e r a t i o n i s the accounting problem of m a t e r i a l i t y . I t i s suggested that an e x p l i c i t guide-l i n e would provide a common approach i n the i n t e r p r e t a t i o n and a p p l i c a t i o n of the m a t e r i a l i t y concept, thereby ensur-i n g that a more c o n s i s t e n t d i s c l o s u r e p r a c t i c e i s f o l l o w e d . U n l i k e the i n t e r e s t e d e x t e r n a l parties,who are only concerned w i t h the i n f o r m a t i o n a l aspect of corporate d i s c l o s u r e , management, however, must a l s o consider i t s m o t i v a t i o n a l , c o m p e t i t i v e , l e g a l and cost i m p l i c a t i o n s . As would be expected, the general r e a c t i o n of corporate management i s one of o p p o s i t i o n to more extensive d i s c l o -sure . In the l i g h t of the foregoing c o n s i d e r a t i o n s , a s t r u c t u r e of f a c t o r s r e l e v a n t to estimate the present net worth of the estimated f u t u r e b e n e f i t s of and f u t u r e costs of f u l l corporate d i s c l o s u r e i s presented, using as a model the technique of the value concept. ACKNOWLEDGEMENTS I am e s p e c i a l l y indebted t o : Dr. B r i a n E. Burke f o r h i s constant encourage-ment, p a t i e n t guidance and c o n t i n u i n g d i r e c t i o n during the w r i t i n g of t h i s study; and Dr. Whatarangi Winiata f o r h i s comments and h e l p f u l suggestions. TABLE OF CONTENTS CHAPTER PAGE I INTRODUCTION I P a r t i e s a t I n t e r e s t 6 P u r p o s e o f S t u d y 7 L i m i t a t i o n s and S c o p e o f S t u d y 7 R e s e a r c h M e t h o d o l o g y 9 C h a p t e r O r g a n i s a t i o n 9 I I RATIONALE OF FULL DISCLOSURE 12 D i f f i c u l t y i n D e f i n i n g F u l l D i s c l o s u r e 12 B a s i s f o r M a k i n g I n f o r m e d I n v e s t m e n t D e c i s i o n s 16 A l l o c a t i o n o f R e s o u r c e s 21 Need f o r C a p i t a l 26 S t a b i l i t y i n S e c u r i t i e s M a r k e t 31 A c c o u n t i n g f o r S t e w a r d s h i p 36 S a v i n g s on T i m e and E x p e n s e 38 C o r p o r a t e D i s c l o s u r e L e g i s l a t i o n 41 Summary 49 I I I THE ACCOUNTING PROBLEM OF MATERIALITY IN DISCLOSURE 58 M e a n i n g o f M a t e r i a l i t y 59 Measurement o f M a t e r i a l i t y 65 R o l e o f Judgement i n D e t e r m i n i n g M a t e r i a l i t y 68 Need f o r S p e c i f i c G u i d e l i n e s 70 Some S u g g e s t e d G u i d e l i n e s t o M a t e r i a l i t y 72 Summary 78 CHAPTER PAGE IV "COST" EFFECTS OF FULL DISCLOSURE 8 3 Meaning of "Cost" 84 I n j u r y to Competitive P o s i t i o n of D i s c l o s i n g C o r p o r a t i o n 85 D i s i n c e n t i v e E f f e c t on Innovation and R i s k - t a k i n g 93 R i s k s of M i s i n t e r p r e t a t i o n A r i s i n g From Ex t e n s i v e D i s c l o s u r e 97 A c t u a l Cost of Data C o l l e c t i o n , C l a s s i f i c a t i o n , and P r e s e n t a t i o n 107 Summary 110 V AN EVALUATION USING THE VALUE CONCEPT APPROACH 116 An O p e r a t i o n a l Meaning of F u l l D i s c l o s u r e 117 An E v a l u a t i o n Based on the Value Concept 123 Summary 133 VI SUMMARY AND CONCLUSION 137 BIBLIOGRAPHY 144 CHAPTER ONE INTRODUCTION C o r p o r a t e d i s c l o s u r e emerges as an i s s u e which commands i n c r e a s i n g a t t e n t i o n and c o n t i n u i n g debate f o l l o w -i n g the advent of the c o r p o r a t i o n as a common form of busin e s s o r g a n i s a t i o n . In a s o l e p r o p r i e t o r s h i p which i s c h a r a c t e r i s e d by the owner's d i r e c t involvement i n the a f f a i r s of h i s b u s i n e s s , v i z . , as entrepreneur i n the day-to-day conduct of the bu s i n e s s and as p r o v i d e r of h i s own c a p i t a l , t h e r e may be r e a l l y no reason and the owner i s under no o b l i g a t i o n to any p a r t y to d i s c l o s e any busi n e s s i n f o r m a t i o n . L i k e w i s e , the need f o r i n f o r m a t i o n d i s c l o s u r e may a l s o be minimal i n r e s p e c t of p a r t n e r s h i p s because, i n most i n s t a n c e s , the p a r t n e r s themselves are i n a c t i v e p a r t i c i p a t i o n ; i f not, they are u s u a l l y p e r s o n a l l y a v a i l a -b l e to observe how t h e i r c o n t r i b u t i o n s of c a p i t a l are being managed. But w i t h the widespread growth of the c o r p o r a t i o n as a predominant form of busi n e s s e n t e r p r i s e , new c i r c u m -s t a n c e s and c o n d i t i o n s are i n t r o d u c e d to the t r a d i t i o n a l b u s i n e s s environment. Thus, i n the c o r p o r a t e s t r u c t u r e , ownership and c o n t r o l are no lo n g e r v e s t e d i n a s i n g l e i n d i -2 v i d u a l or a s m a l l group of i n d i v i d u a l s . Rather, ownership i n a c o r p o r a t i o n may be spread over many thousands of 'owners' who are apt to be w i d e l y d i s p e r s e d throughout a c o u n t r y . C l e a r l y , such an unwieldy group i s not l i k e l y to e x e r c i s e the f u n c t i o n of management e f f e c t i v e l y . Hence, the c o n t r o l and the o p e r a t i o n of such c o r p o r a t e b u s i n e s s e s have become the r e s p o n s i b i l i t y of p r o f e s s i o n a l managers. With t h i s being the case, i t i s c l e a r t h a t the q u e s t i o n of c o r p o r a t e d i s c l o s u r e must be one of c e n t r a l importance because the absentee owners would need to be adequately informed about t h e i r companies' a c t i v i t i e s and p r o g r e s s . A survey of the a v a i l a b l e l i t e r a t u r e , however, seems to suggest t h a t not enough p e r t i n e n t c o r p o r a t e i n f o r m a t i o n i s being d i s c l o s e d , and t h a t which i s d i s c l o s e d , i s being p r e s e n t e d i n such a g g r e g a t i v e form t h a t i t s u t i l i t y i s but l i m i t e d . R i p l e y i s b e l i e v e d to have made one of the e a r l -i e s t r e f e r e n c e s to the q u e s t i o n of c o r p o r a t e d i s c l o s u r e . Thus he observes t h a t ( I ) : The sudden advent of widespread popular ownership of c o r p o r a t i o n s s i n c e the World War has c r e a t e d e n t i r e l y new c i r c u m s t a n c e s and c o n d i t i o n s i n the b u s i n e s s w o r l d . Main S t r e e t and W a l l S t r e e t have come to c r o s s one another at r i g h t angles —•- Main S t r e e t , our synonym f o r t h i s phenomenon of wide-spread ownership, and W a l l S t r e e t as a p p l i e d to the well-known agg r e g a t i o n of f i n a n c i a l and d i r e c t i o n a l power i n 3 o u r g r e a t c a p i t a l c e n t e r s . T h i s i n t e r -s e c t i o n o f i n t e r e s t , so o f t e n a t c r o s s p u r p o s e s , i s marked by an i m m i n e n t d a n g e r o f c o l l i s i o n a t t h e j u n c t i o n p o i n t o f o w n e r s h i p and management Our A m e r i -can b u s i n e s s a f f a i r s , i n s o f a r a s t h e y have assumed t h e c o r p o r a t e f o r m t h r o u g h t h i s r e c e n t g r o w t h i n p u b l i c o w n e r s h i p 8 , a r e s t i l l l a r g e l y c a r r i e d on i n t w i l i g h t . S i n c e t h e n , s u b s t a n t i a l p r o g r e s s has been n o t e d i n t h e d i r e c t i o n o f more and b e t t e r d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n . ^ A c l a s s i c example o f t h i s d e v e l o p m e n t i s i n c o n n e c t i o n w i t h t h e d i s c l o s u r e o f s a l e s and c o s t o f goods s o l d i n t h e income s t a t e m e n t . T h u s i t m i g h t be o b s e r v e d t h a t a t one t i m e , i t was common p r a c t i c e n o t t o d i v u l g e such / i n f o r m a t i o n ( 2 ) . T o d a y , however, o m m i s s i o n o f s u c h i t e m s w o u l d c e r t a i n l y r e n d e r c o r p o r a t e d i s c l o s u r e n o t e v e n m i n i m a l l y a d e q u a t e . a I t s h o u l d be n o t e d t h a t p u b l i c o w n e r s h i p i n t h i s c o n t e x t , as u s e d by R i p l e y , means s i m p l y w i d e d i s p e r -s i o n o f o w n e r s h i p among t h e t h o u s a n d s o f s c a t t e r e d s t o c k -h o l d e r s , and must n o t be c o n f u s e d w i t h t h e i d e a a s s o c i a t e d w i t h p u b l i c u n d e r t a k i n g s . b S e e , f o r example, A n i t a I . T y r a , " F i n a n c i a l D i s c l o s u r e P r o b l e m s In The U n i t e d S t a t e s , " T he A c c o u n t a n t ' s  M a g a z i n e , May 1970, p. 201. c I n d e e d t h i s i s s t i l l t r u e i n t h e c a s e o f t h e S w i s s e x p e r i e n c e : " S w i s s c o r p o r a t i o n s t e n d t o p u b l i s h a ' n e t t e d ' p r o f i t and l o s s s t a t e m e n t ; s a l e s and c o s t o f g o o d s s o l d a r e o m i t t e d , and t h e s t a t e m e n t b e g i n s w i t h g r o s s m a r g i n on s a l e s . T he r e a s o n g e n e r a l l y g i v e n i s t h e b e l i e f t h a t 4 In s p i t e of the advances made i n the d i s c l o s u r e of d e s i r a b l e i n f o r m a t i o n , p r e s s u r e on c o r p o r a t i o n s to d i s -c l o s e t h e i r o p e r a t i o n s even more e x t e n s i v e l y has never been g r e a t e r than i t i s i n r e c e n t y e a r s . Two major developments have c o n t r i b u t e d to t h i s a d d i t i o n a l p r e s s u r e ( 3 ) : (a) I n c e e a s i n g Complexity Of Bu s i n e s s O r g a n i s a -t i o n s : The growing t r e n d of bu s i n e s s e s i n the postwar era to expand through a s e r i e s of mergers and a c q u i s i t i o n s has r e s u l t e d i n bu s i n e s s combinations which are n e i t h e r h o r i z o n t a l nor v e r t i c a l * 3 ; they r e p r e s e n t , i n s t e a d , d i v e r -s i f i e d companies w i t h i n t e r e s t s i n i n d u s t r i e s which may have n o t h i n g i n common or which are o n l y remotely r e l a t e d . Thus, a c c o r d i n g to the U n i t e d S t a t e s F e d e r a l Trade Commis-s i o n f i g u r e s , no l e s s than 70 per cent of a l l important d i s c l o s u r e of s a l e s and c o s t of goods s o l d would tend to a f f e c t a d v e r s e l y the e x i s t e n c e and p r o s p e r i t y of many Swiss companies." Quoted from Marcel F. Kohler and Adolph Mataz, "Swiss F i n a n c i a l R e p o r t i n g And A u d i t i n g P r a c t i c e s , " Abacus, August, 1968, p. 7. d I t i s i n t e r e s t i n g to note that t h e r e has been a s i g n i f i c a n t change i n the type of merger from t h a t of an e a r l i e r p e r i o d . The e a r l i e r mergers have been d e s c r i b e d as e i t h e r h o r i z o n t a l or v e r t i c a l . A h o r i z o n t a l merger i s one i n which companies producing i d e n t i c a l or complemen-t a r y products are j o i n e d t o g e t h e r i n t o an i n t e g r a t e d e n t e r -p r i s e . In a v e r t i c a l merger, i n t e g r a t i o n i s achieved w i t h s u p p l i e r s or d i s t r i b u t o r s . Both are r e s t r i c t e d i n the United S t a t e s , however, under the C l a y t o n A c t . T h i s may be one of the reasons behind the p o p u l a r i t y of the c u r r e n t brand of bu s i n e s s combinations. See, f o r example, James M. and P. Jeanne P a t t e r s o n , "Conglomerates: The L e g a l I s s u e s , " B u s i n e s s H o r i z o n s , February, 1968, p. 39. 5 m e r g e r s and a c q u i s i t i o n s between I 9 6 0 and 1965 were o f t h e n a t u r e o f d i v e r s i f i e d c o m p a n i e s , and o n l y 13 p e r c e n t were h o r i z o n t a l ( 4 ) . The s i g n i f i c a n c e o f t h i s d e v e l o p m e n t f r o m t h e s t a n d p o i n t o f c o r p o r a t e d i s c l o s u r e i s t h e c o n s e q u e n t l o s s o f c o r p o r a t e i d e n t i f i c a t i o n w i t h any s p e c i f i c i n d u s t r y . T h i s means t o s a y t h a t , i n s o f a r as d i s c l o s u r e i s on a t o t a l company b a s i s , w h i c h i s t h e r e f o r e a g g r e g a t i v e , i n t e r e s t e d p a r t i e s may f i n d l i m i t e d u s e f u l n e s s f r o m s u c h c o r p o r a t e i n f o r m a t i o n . B e c a u s e o f t h i s , t h e y a r e u r g i n g d i v e r s i f i e d c o m p a n i e s t o r e p o r t i n g r e a t e r d e t a i l t h a n t h e s e c o m p a n i e s seem p r e p a r e d t o d i v u l g e . (b) G r o w i n g I m p o r t a n c e Of I n s t i t u t i o n a l I n v e s -t o r s And The R o l e Of F i n a n c i a l A n a l y s t s : The o t h e r m a j o r d e v e l o p m e n t i n r e c e n t y e a r s has been t h e i n c r e a s i n g p a r t i -c i p a t i o n by i n s t i t u t i o n a l i n v e s t o r s v i z . , m u t u a l f u n d s , p e n s i o n f u n d s , i n s u r a n c e c o m p a n i e s , f o u n d a t i o n s , e t c . By r e a s o n o f t h e s i z e o f t h e i r i n v e s t m e n t s , i t i s n e e d l e s s t o s a y how i m p o r t a n t i t i s t h a t t h e r e s h o u l d be a d e q u a t e d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n t o e n a b l e them t o l o c a t e t h e b e s t o p p o r t u n i t i e s . A c c o m p a n y i n g t h e g r o w t h o f i n s t i t u t i o n a l i n v e s t o r s has been an i n c r e a s e i n t h e number and i m p o r t a n c e o f f i n a n -c i a l a n a l y s t s ( 5 ) . The h i g h l y s i g n i f i c a n t r o l e o f t h e a n a l y s t s i s o b s e r v e d by S i l b e r m a n when he w r i t e s t h a t ( 6 ) : 6 I n p a r t , t h i s c o m i n g o f age o f t h e a n a l y s t stems f r o m t h e new p u b l i c - r e l a t i o n s c o n s c i o u s n e s s o f A m e r i c a n b u s i n e s s . P r i m a -r i l y , however, i t r e f l e c t s t h e a n a l y s t ' s g r o w i n g power and i n f l u e n c e o v e r s t o c k p r i c e s and i n v e s t m e n t d e c i s i o n s as a r e s u l t o f t h e t r e m e n d o u s p o s t - w a r g r o w t h o f p e n -s i o n f u n d s , m u t u a l f u n d s , p e r s o n a l t r u s t s , and t h e l i k e . L a s t y e a r f i n a n c i a l i n s t i -t u t i o n s a c c o u n t e d f o r o v e r h a l f o f a l l n e t p u r c h a s e s o f common s t o c k . A n a l y s t s may s w i n g as much as $30 m i l l i o n i n t o o r o u t o f a s t o c k t h r o u g h r e c o m m e n d a t i o n s t o t h e i r f i r m ' s i n d i v i d u a l s o r i n s t i t u t i o n a l a c c o u n t s . S u c h men c a n t r u t h f u l l y be s a i d t o be among t h e most p o w e r f u l men i n W a l l S t r e e t . PARTIES AT INTEREST As w o u l d be e x p e c t e d , d i v e r s e g r o u p s a r e i n t e -r e s t e d i n t h e a c t i v i t i e s o f t h e c o r p o r a t e e n t e r p r i s e . T h e y a r e , among o t h e r s , t h e s t o c k h o l d e r s , f i n a n c i a l i n s t i t u -t i o n s , p r o f e s s i o n a l a n a l y s t s , c r e d i t g r a n t o r s , e m p l o y e e s , c u s t o m e r s , g o v e r n m e n t a l and o t h e r r e g u l a t o r y a g e n c i e s , and, o f c o u r s e , t h e management i t s e l f . C l e a r l y , w i t h s u c h a b r o a d s p e c t r u m o f i n t e r e s t e d p a r t i e s , i t i s r e a s o n a b l e t o e x p e c t t h a t t h e r e w o u l d be some o v e r l a p p i n g o f i n t e r e s t s . T h u s , f o r example, a g o v e r n -m e n t a l r e g u l a t o r y body may be i n t e r e s t e d i n a d e q u a t e d i s c l o -s u r e , by c o r p o r a t i o n s , o f i n f o r m a t i o n a b o u t t h e i r a c t i v i t i e s so t h a t t h e p u b l i c i n t e r e s t can be s e r v e d . " B u t t h i s d i r e c t i n v o l v e m e n t o f r e p r e s e n t a t i v e s o f g o v e r n m e n t may be r e f l e c t e d a l s o as i n d i r e c t i n t e r e s t s o f a l l r e s p o n s i b l e c i t i z e n s who a r e i n c l u d e d i n t h e o t h e r c a t e g o r i e s o f i n t e r e s t e d p a r t i e s . " ( 7 ) 7 On t h e o t h e r hand, a c o n f l i c t o f i n t e r e s t s may a l s o be e v i d e n t between i n t e r e s t e d e x t e r n a l p a r t i e s and c o r p o r a t e management. T h u s , t h e d e s i r e o f o u t s i d e r s f o r more e x t e n s i v e and more d e t a i l e d d i s c l o s u r e t o meet t h e i r d i v e r s e i n f o r m a t i o n a l n e e d s i s f r e q u e n t l y i n c o n f l i c t w i t h t h e d e s i r e o f management t o m a i n t a i n s e c r e c y . I t f o l l o w s , t h e r e f o r e , t h a t i n c o n s i d e r i n g t h e r a t i o n a l e o f f u l l d i s -c l o s u r e , t h e c o s t i m p l i c a t i o n s o f s u c h d i s c l o s u r e s h o u l d a l s o be r e c o g n i s e d . PURPOSE OF STUDY The p u r p o s e o f t h i s s t u d y i s t o a p p r a i s e c r i t i -c a l l y f r o m a g l o b a l v i e w p o i n t t h e r a t i o n a l e o f f u l l d i s c l o -s u r e o f c o r p o r a t e i n f o r m a t i o n . I n a t t e m p t i n g t o make t h i s e v a l u a t i o n , i t i s p r o p o s e d t o employ as a m o d e l t h e t e c h -n i q u e o f t h e v a l u e c o n c e p t w h i c h s e e k s t o e s t i m a t e p r e s e n t w o r t h by t h e d i s c o u n t i n g o f e s t i m a t e d f u t u r e i n f l o w s and o u t f l o w s ' o f v a l u e s . T h i s m o d e l , as a p p l i e d t o t h e p u r p o s e o f t h i s study;, means t h e r e w i l l be an a t t e m p t , h y p o t h e t i c a l l y , t o p r e s e n t a s t r u c t u r e o f f a c t o r s r e l e v a n t t o e s t i m a t e t h e p r e s e n t n e t w o r t h o f t h e e s t i m a t e d f u t u r e b e n e f i t s o f and f u t u r e c o s t s o f f u l l d i s c l o s u r e . LIMITATIONS AND SCOPE OF STUDY The use o f t h e t e c h n i q u e o f t h e v a l u e c o n c e p t 8 has l i m i t a t i o n s l a r g e l y b e c a u s e some o f t h e p o s s i b l e f u t u r e b e n e f i t s o f and p o s s i b l e f u t u r e c o s t s o f f u l l d i s c l o s u r e a r e n o t e a s i l y a m e n a b le t o measurement i n m o n e t a r y t e r m s . T h u s , s u b j e c t i v e c o n s i d e r a t i o n s may have a s i g n i f i c a n t b e a r i n g upon t h e f i n a l r e s u l t s . T h e y r e f e r t o t h e assump-t i o n s made a b o u t s u c h f a c t o r s as t h e r a t e o f d i s c o u n t , t h e e x p e c t e d f l o w s o f b e n e f i t s and o f c o s t s o f f u l l d i s c l o s u r e . T h u s , g i v e n a d i f f e r e n t s e t o f a s s u m p t i o n s f o r t h e s e f a c t o r s , t h e c o n c l u s i o n drawn may w e l l be d i f f e r e n t o r e v e n c o n t r a -d i c t o r y , s u b j e c t t o w h e t h e r t h e d i s c o u n t e d b e n e f i t s o f f u l l d i s c l o s u r e o u t w e i g h t h e d i s c o u n t e d c o s t s o r v i c e v e r s a . However, as t h e p r e s e n t e f f o r t i s c o n f i n e d t o a t h e o r e c t i c a l e x p o s i t i o n , t h e a c t u a l m e c h a n i c s o f a s c e r t a i n -i n g t h e n e t b e n e f i t o r t h e n e t c o s t by r e s o r t i n g t o some q u a n t i t a t i v e t e c h n i q u e s i s o u t s i d e t h e s c o p e o f t h i s s t u d y . The v a l u e c o n c e p t t e c h n i q u e i s p r o p o s e d i n t h i s s t u d y o n l y i n s o f a r as i t i s e m p l o y e d t o e x p l a i n t h e r a t i o n a l e o f b e h a -v i o u r o f t h e p a r t i e s a t i n t e r e s t r e g a r d i n g t h e q u e s t i o n o f c o r p o r a t e d i s c l o s u r e . I n t h e c o n t e x t o f t h i s s t u d y a l s o , t h e m e a n i n g o f d i s c l o s u r e i s c o n f i n e d t o t h a t a s p e c t o f c o r p o r a t e r e p o r t -i n g w h i c h i s c o n c e r n e d w i t h t h e p r e s e n t a t i o n o f d e s c r i p t i v e o r s u p p l e m e n t a l d a t a . No a t t e m p t w i l l be made t o examine t h e f o r m and a r r a n g e m e n t o f t h e f o r m a l s t a t e m e n t s o r t h e w o r d i n g t h e r e i n . B u t t h e i r i m p o r t a n c e i n f a c i l i t a t i n g u n d e r -9 s t a n d i n g by statement r e a d e r s s h o u l d not be o v e r l o o k e d . 6 RESEARCH METHODOLOGY The m a t e r i a l f o r t h i s study i s drawn p r i m a r i l y from secondary s o u r c e s . These i n c l u d e books, j o u r n a l s , r eviews, b u s i n e s s magazines, and t h e s e s , both p u b l i s h e d and u n p u b l i s h e d , r e l a t i n g to the s u b j e c t of c o r p o r a t e d i s -c l o s u r e . Pronouncements by v a r i o u s a u t h o r i t i e s , l e g a l and p r o f e s s i o n a l , p r o v i d e another u s e f u l source m a t e r i a l f o r t h i s study. CHAPTER ORGANISATION Chapter Two i s devoted p r i m a r i l y to a c o n s i d e r a -t i o n of the p o s s i b l e b e n e f i t a s p e c t s of c o r p o r a t e d i s c l o -sure from the v i e w p o i n t s of the d i f f e r e n t p a r t i e s at i n t e -r e s t . The d i f f i c u l t y i n d e f i n i n g " f u l l d i s c l o s u r e " w i l l f i r s t be d i s c u s s e d . Chapter Three t u r n s to the ac c o u n t i n g problem of m a t e r i a l i t y and p o i n t s out the importance of e x p l i c i t g u i d e l i n e s f o r making m a t e r i a l i t y d e c i s i o n s , on the premise t h a t the l a c k of a common approach i n the i n t e r p r e t a t i o n e See, f o r example, F r e d J . Soper and Robert D o l p h i n , J r . , " R e a d a b i l i t y And Co r p o r a t e Annual Reports," A c c o u n t i n g Review, A p r i l , 1964, pp. 358-362; a l s o , J.E.Smith and N.P.Smith, " R e a d a b i l i t y In F i n a n c i a l R e p o r t i n g , " Account-i n g Review, J u l y , 1971, pp. 552-561. 10 and a p p l i c a t i o n o f t h e m a t e r i a l i t y c o n c e p t may a l s o be r e s p o n s i b l e f o r t h e p r e s e n t i n a d e q u a c y i n d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n . C h a p t e r F o u r f o c u s s e s a t t e n t i o n on t h e p o s s i b l e c o s t e f f e c t s t h a t may r e s u l t f r o m f u l l d i s c l o s u r e . The meaning o f t h e t e r m " c o s t " , as u s e d i n t h i s s t u d y , i s f i r s t e x p l a i n e d . C h a p t e r F i v e a t t e m p t s t o p l a c e i n j u x t a p o s i t i o n t h e c o n s i d e r a t i o n o f b e n e f i t s and c o s t s o f f u l l d i s c l o s u r e w h i c h have been e x a m i n e d i n t h e p r e c e d i n g c h a p t e r s , and t o s u b j e c t t h e s e c o n s i d e r a t i o n s t o e v a l u a t i o n by t h e p r o p o s e d v a l u e c o n c e p t t e c h n i q u e . C h a p t e r S i x t i e s t o g e t h e r t h e m a t e r i a l c o v e r e d i n t h e e a r l i e r c h a p t e r s and s u m m a r i z e s t h e e n t i r e d i s c u s -s i o n . I I Footnotes I Wil l iam Z . R i p l e y , Main Street And Wall S t ree t , (Boston: L i t t l e , Brown & C o . , 1926), as quoted by J . L . F o x in "Useful Comparabi l i ty In F i n a n c i a l Report ing ," Journal  of Accountancy, December, 1964, p . 46. 2 W.W.Cooper, N.Dopuch, and T . F . K e l l e r , "Budgetary Di sc losure And Other Suggestions For Improving Accounting Reports ," Accounting Review, October, 1968, p. 645, foo t -note 21. 3 R.W.Haack, "Viewpoints In Corporate D i s c l o s u r e , " F i n a n c i a l Execut ive , February, 1969, p. 20. 4 G i l b e r t Burck, "The Mult i -Market C o r p o r a t i o n , " Fortune, February, 1967, p. 131. 5 Robert K. Mautz, F i n a n c i a l Reporting By D i v e r -s i f i e d Companies, F i n a n c i a l Executives Research Foundation, New York, 1968, pp. 85-86. 6 Charles E . Si lberman, "Wall S t r e e t ' s I n f l u e n t i a l Ana lys t s ," Fortune , January, 1957, p. 3, p. 127, as quoted by Charles T . Horngren i n "Disc losure: 1957," Accounting  Review, October, 1957, p. 598. 7 A l f r e d Rappaport, Peter A.rEirmAn, Stephen A. Ze f f , Publ ic Report ing By Conglomerates, (Englewood C l i f f s , New Jersey: P r e n t i c e - H a l l , I n c . , 1968), p. 114. CHAPTER TWO RATIONALE OF FULL DISCLOSURE I m p l i c i t i n t h e demands f o r more e x t e n s i v e c o r -p o r a t e d i s c l o s u r e by t h e many se g m e n t s o f s o c i e t y i s c l e a r l y a r e c o g n i t i o n t h a t t h e i n f o r m a t i o n , w h i c h a c o r p o -r a t i o n i s p r e s e n t l y d i s c l o s i n g and o u g h t t o be d i s c l o s i n g , must have some u t i l i t y t o t h e s e i n t e r e s t e d p a r t i e s . T he u t i l i t y o f t h i s i n f o r m a t i o n may be j u d g e d a c c o r d i n g t o w h e t h e r i t a p p r o p r i a t e l y meets t h e i r n e e d s f o r i n f o r m a t i o n . I t i s t h e p u r p o s e o f t h i s c h a p t e r , t h e r e f o r e , t o e l a b o r a t e on some o f t h e more i m p o r t a n t n e e d s , i n p a r t i -c u l a r t h o s e w h i c h c o n c e r n t h e p r o s p e c t i v e i n v e s t o r s , s e c u r i -t i e s a n a l y s t s , s t o c k h o l d e r s , s o c i e t y a t l a r g e , and g o v e r n -m e n t a l a g e n c i e s , and t o s u g g e s t t h e b e n e f i t s t h a t may be d e r i v e d f r o m f u l l c o r p o r a t e d i s c l o s u r e . B u t b e f o r e p r o -c e e d i n g t o do t h i s , however, i t may be a p p r o p r i a t e t o d i s -c u s s t h e m e a n i n g o f " f u l l d i s c l o s u r e " and t h e d i f f i c u l t y o f d e f i n i n g i t i n s p e c i f i c t e r m s . D I F F I C U L T Y IN DEFINING FULL DISCLOSURE A d m i t t e d l y , i t i s n o t an. e a s y t a s k t o f o r m u l a t e a 13 g e n e r a l l y a c c e p t a b l e d e f i n i t i o n o f f u l l d i s c l o s u r e . 3 B r o a d -l y , however, i t may be p o s s i b l e t o d i s t i n g u i s h two main a p p r o a c h e s t h a t a r e u s u a l l y a d o p t e d i n e f f o r t s t o d e f i n e t h e meaning o f d i s c l o s u r e ( I ) : (a) D i s c l o s u r e may be p o s i t i v e l y c o n c e i v e d i n t h e s e n s e t h a t i t d i r e c t s a t t e n t i o n t o t h e i m p o r t a n c e o f a s u f f i c i e n c y o f c o r p o r a t e i n f o r m a t i o n i n t h e f i n a n c i a l s t a t e -ments, as m i g h t be s u g g e s t e d i n t h e f o l l o w i n g d e f i n i t i o n ( 2 ) : D i s c l o s u r e i s t h a t i n t a n g i b l e m easure o f t h e a d e q u a c y o f t h e d e s c r i p -t i v e and s u p p l e m e n t a l i n f o r m a t i o n i n f i n a n c i a l s t a t e m e n t s . (b) D i s c l o s u r e may be n e g a t i v e l y c o n c e i v e d b e c a u s e e m p h a s i s i s h e r e d i r e c t e d t o t h e c o n s e q u e n c e s t h a t m i g h t r e s u l t i f d e s i r a b l e i n f o r m a t i o n i s w i t h h e l d o r i n a d e q u a t e l y d i s c l o s e d . An example r e f l e c t i n g t h i s p o i n t o f v i e w i s t h a t (3) d i s c l o s u r e r e q u i r e s t h e r e v e l a t i o n o f i n f o r m a t i o n w h i c h , i f w i t h h e l d , m i g h t i n f l u e n c e a p r o s p e c t i v e c r e d i t o r ' s d e c i -s i o n t o l o a n f u n d s or a p r o s p e c t i v e i n v e s -t o r ' s d e c i s i o n t o buy s e c u r i t i e s . I t i s o b s e r v e d , however, t h a t f r e q u e n t l y t h e d e f i -a W e b s t e r ' s T h i r d New I n t e r n a t i o n a l D i c t i o n a r y d e f i n e s " d i s c l o s e " as me a n i n g " t o open up" t o g e n e r a l know-l e d g e ; t o e x p o s e t o v i e w ; t o make known; t o d i v u l g e . " p. 645. 14 n i t i o n s o f d i s c l o s u r e a r e t o o g e n e r a l l y e x p r e s s e d t o be h e l p f u l as g u i d e l i n e s . The comment o f G r i f f i n and W i l l i a m s i s p e r t i n e n t ( 4 ) : The d e f i n i t i o n s o f t h e d i s c l o s u r e c o n c e p t t e n d t o e x p o s e much o f i t s e s s e n -t i a l n a t u r e ; y e t , t h e y o f f e r l i t t l e d i r e c -t i o n a l a i d i n e s t a b l i s h i n g t h e d i m e n s i o n s o r s c o p e o f t h i s r e s p o n s i b i l i t y i n f i n a n -c i a l r e p o r t i n g . T h e y f a i l t o p r o v i d e g u i d a n c e and s u p p o r t f o r methods o f a t t a i n -i n g d e s i r a b l e a c c o u n t i n g o b j e c t i v e s . N e v e r t h e l e s s , i t i s g e n e r a l l y a g r e e d t h a t t h e n e e d s o f u s e r s s h o u l d be a c o n t r o l l i n g f a c t o r i n t h e q u e s -t i o n o f c o r p o r a t e d i s c l o s u r e . * ' The dilemma l i e s i n i d e n t i -f y i n g t h e v a s t c o m p l e x o f u s e r s and what s p e c i f i c i n f o r m a -t i o n i s d e s i r e d ( 5 ) . T h u s , W e r n t z a p p r o p r i a t e l y p o s e s t h e f o l l o w i n g q u e s t i o n s , t h e a n s w e r s t o w h i c h m i g h t p r o v i d e a c m e a ning o f f a i r d i s c l o s u r e ( 6 ) : b B u t , as Lee c o n t e n d s , t h e i n f o r m a t i o n a l c o n -t e n t s o f t h e f i n a n c i a l s t a t e m e n t s have n e v e r been a d e q u a t e -l y r e l a t e d t o u s e r n e e d s and r e q u i r e m e n t s The g u i d e -l i n e a d o p t e d has m a i n l y a p p e a r e d t o be t h a t f u r t h e r d i s -c l o s u r e s h o u l d be made b e c a u s e i t i s presumed t o be ' h e l p f u l ' , o r b e c a u s e i t i s presumed t o be ' u s e f u l ' . How-e v e r , t h e q u e s t i o n s ' h e l p f u l and u s e f u l t o whom?' and • f o r what p u r p o s e ? ' have n e v e r been a s k e d , l e t a l o n e a n s -w e r e d . T. A . L e e , " U t i l i t y And R e l e v a n c e The S e a r c h F o r R e l i a b l e F i n a n c i a l A c c o u n t i n g I n f o r m a t i o n , " A c c o u n t i n g  and B u s i n e s s R e s e a r c h , Summer, 1971, pp. 242-243. c In r e c e n t y e a r s a number o f e x p r e s s i o n s have g a i n e d p o p u l a r u s a g e i n a c c o u n t i n g and b u s i n e s s l i t e r a -t u r e w h i c h a t t e m p t s t o d e s c r i b e t h e d i s c l o s u r e c o n c e p t . T h e s e e x p r e s s i o n s a r e " a d e q u a t e d i s c l o s u r e " , " f a i r d i s c l o -15 T h i s dilemma i n v o l v e s a l l s o r t s of s u b s i d i a r y q u e s t i o n s , such as: who w i l l be u s i n g the information;, how s o p h i s -t i c a t e d i n such matters s h a l l we assume our audience to be; what i s the modicum of data t h a t i t i s f a i r to assume the average reader would b e l i e v e important; should enough data be g i v e n so t h a t a l l or a m a j o r i t y of r e a d e r s would say the d i s c l o s u r e i s adequate, even i f h a l f of such r e a d e r s would say there was too much given? I t s hould a l s o be noted t h a t d i s c l o s u r e must not be looked upon as a s t a t i c concept. T h i s i s c l e a r l y p o i n t e d out i n the f o l l o w i n g c i t a t i o n s : (a) These boundaries (of d i s c l o s u r e ) may never be f i n a l . The economic c o n d i t i o n s which a f f e c t the stewardship r e l a t i o n s h i p s are i n a c o n s t a n t s t a t e of f l u x , thus r e q u i r i n g a c o n s t a n t r e v a -l u a t i o n of the e x t e n t to which the f o r -m a l i s e d r e p o r t i n g s t r u c t u r e a c t u a l l y d i s c l o s e s the a p p r o p r i a t e economic data (7) . (b) D i s c l o s u r e i s not a one-time-only s i t u a t i o n f o r a s i n g l e item on the f i n a n -c i a l statements. I t i s a concept which s u r e " , and " f u l l d i s c l o s u r e " . As noted by Hendriksen ( 8 ) , "adequate d i s c l o s u r e i m p l i e s a minimum amount of d i s c l o -sure congruous w i t h the n e g a t i v e o b j e c t i v e of making the statements not m i s l e a d i n g . F a i r and f u l l d i s c l o s u r e are more p o s i t i v e c o n c e p t s . F a i r d i s c l o s u r e i m p l i e s an e t h i c a l o b j e c t i v e of p r o v i d i n g equal treatment f o r a l l p o t e n t i a l r e a d e r s . F u l l d i s c l o s u r e i m p l i e s the p r e s e n t a t i o n of a l l r e l e v a n t i n f o r m a t i o n . However, a p p r o p r i a t e d i s c l o -sure of i n f o r m a t i o n s i g n i f i c a n t to i n v e s t o r s and o t h e r s should be adequate, f a i r and f u l l . There i s no r e a l d i f f e -rence among these concepts i f they are used i n the proper c o n t e x t . " In t h i s study, t h e r e f o r e , no d i f f e r e n t i a t i o n among the v a r i o u s terms w i l l be made. 16 p e r m e a t e s t h e s t a t e m e n t s . I t must be c o n s i d e r e d a g a i n f o r e v e r y i t e m e a c h t i m e t h e f i n a n c i a l s t a t e m e n t s a r e p r e p a r e d . B a c h p r e s e n t a t i o n i s a new s i t u a t i o n o f t h a t t i m e ; e a c h p r e s e n -t a t i o n has a new s e t o f c i r c u m s t a n c e s (9) . T h u s , i t c a n be s e e n , i n t h e l i g h t o f t h e f o r e -g o i n g d i s c u s s i o n , t h a t f u l l d i s c l o s u r e may be e a s i l y s t a t e d b u t i t i s d i f f i c u l t t o d e f i n e i n c o n c r e t e t e r m s . A r e c o n s i d e r a t i o n o f t h e meaning o f f u l l c o r p o r a t e d i s -c l o s u r e w i l l be made i n c h a p t e r f i v e f o l l o w i n g d i s c u s s i o n o f t h e d i f f e r e n t v i e w p o i n t s r e g a r d i n g d i s c l o s u r e . BASIS FOR MAKING INFORMED INVESTMENT DECISIONS Of t h e many e x t e r n a l u s e r s o f c o r p o r a t e r e p o r t s , p r o b a b l y t h e most i n f l u e n t i a l g r o u p i s t h a t r e p r e s e n t e d by e x i s t i n g and p r o s p e c t i v e i n v e s t o r s t o g e t h e r w i t h t h e i r a d v i s e r s , t h e f i n a n c i a l a n a l y s t s , i n v i e w o f t h e i r c o n t r i -b u t i o n s t o c o r p o r a t e c a p i t a l . T he A m e r i c a n A c c o u n t i n g A s s o c i a t i o n ' s C o m m i t t e e on C o n c e p t s and S t a n d a r d s , i n t h e i r r e p o r t , a l s o a s s e r t s t h a t " t h e u n d e r l y i n g d e t e r m i n a n t o f a d e q u a c y o f d i s c l o s u r e i n p u b l i s h e d f i n a n c i a l r e p o r t s i s t h e i r u s e f u l n e s s i n making d e c i s i o n s , p a r t i c u l a r l y w i t h r e s p e c t t o i n v e s t m e n t p r o b l e m s . " (10) The d e c i s i o n s t h a t an i n v e s t o r may have t o c o n -s i d e r a r e p r i m a r i l y c o n c e r n e d w i t h r e t a i n i n g , i n c r e a s i n g , o r d i s p o s i n g o f h i s i n v e s t m e n t s . What s h o u l d be t h e a p -17 p r o p r i a t e d e c i s i o n to make, however, would depend on h i s a p p r a i s a l of the d i f f e r e n t investment o p p o r t u n i t i e s . •i Thus, an i n v e s t o r may f i r s t have to a s s e s s , f o r each investment a l t e r n a t i v e , the expected b e n e f i t s as may be d e r i v e d from e s t i m a t e d f u t u r e d i v i d e n d s and c a p i t a l g a i n s , and then to compare these p o t e n t i a l b e n e f i t s w i t h the c o s t s of ownership as expressed by the market p r i c e of s t o c k . T h i s w i l l p r o v i d e some i n d i c a t i o n of the es t i m a t e d f u t u r e p r o f i t a b i l i t y o f , and hence, the p r o j e c t e d r a t e of r e t u r n on, each a l t e r n a t i v e use of h i s c a p i t a l . Needless to say, assuming t h a t a l l e l s e remains the same, the i n v e s -t o r s h ould i n v e s t i n the c o r p o r a t i o n t h a t i s expected to y i e l d the h i g h e s t r a t e of r e t u r n . Mautz l i s t s s i x company c h a r a c t e r i s t i c s which have been regarded by i n v e s t o r s as p r o v i d i n g a u s e f u l guide to making investment d e c i s i o n s . (II) These are, i n order of importance (12): growth p o t e n t i a l ; managerial a b i l i t y ; p r o f i t a b i l i t y ; f i n a n c i a l c o n d i t i o n ; s t a b i l i t y ; and f i n a n c i a l p o l i c y . Of these c h a r a c t e r i s t i c s , the f i r s t t h r e e are by f a r r e l a t i v e l y more importa n t . The growth p o t e n t i a l of a company i s i n d i c a t e d by the f o l l o w i n g i n f o r m a t i o n (13): growth of major markets; r a t e of growth e a r n i n g s per share; r e s e a r c h and d e v e l o p -ment e x p e n d i t u r e s ; r a t e of growth market 18 share; r a t e of growth gross revenue; r a t e of growth, net income; r a t e of growth t o t a l a s s e t s . The managerial a b i l i t y of a company i s r e v e a l e d by (14): growth of company; r e p u t a t i o n of key p e r s o n n e l ; r e t u r n on common e q u i t y ; r a t i o of net income bef o r e i n t e r e s t on i n v e s t e d c a p i t a l ; f i n a n c i a l c o n d i t i o n ; net income; market performance of s t o c k s . I n d i c a t o r s of the p r o f i t a b i l i t y of a company are (15): r e t u r n on common e q u i t y ; net income/sales; r e t u r n on t o t a l a s s e t s ; gross p r o f i t / s a l e s ; amount of o p e r a t i n g p r o f i t ; s a l e s / t o t a l a s s e t s ; amount of net income; i n c r e a s e i n book v a l u e / s h a r e ; i n c r e a s e i n market v a l u e / s h a r e . F u r t h e r , i n v e s t o r s are i n t e r e s t e d i n f u t u r e -o r i e n t e d i n f o r m a t i o n , so i t has been suggested t h a t t h e r e should a l s o be d i s c l o s u r e of a company's f u t u r e plans and e x p e c t a t i o n s ( 16). A c c o r d i n g to B i r n b e r g and Dopuch, "management must p r o v i d e the i n v e s t o r w i t h i n f o r m a t i o n on thre e types of e x p e c t a t i o n s " (17: (a) P r o s p e c t s f o r the economy. (b) P r o s p e c t s f o r the i n d u s t r y and the e n t e r p r i s e as a member of t h a t s u b s e t . (c) The s p e c i f i c e x p e c t a t i o n s which u n d e r l i e the major investments made i n r e s o u r c e s and the p r o j e c t s undertaken i n attempting to achieve the e n t e r p r i s e ' s g o a l s . 19 Lev and Schwartz propose that business enter -pr i ses should d i s c l o s e human c a p i t a l values in the f i n a n -c i a l statements as w e l l . "The relevance of th i s informa-t i o n l i e s i n the fact that i t concerns o r g a n i z a t i o n a l changes in the f i rm's labour force h i ther to not reported by accountants." (18) I t might be observed that , in Mautz's study, i t i s s tated that a knowledge of management per-formance i s an important guide to making investment d e c i -s i ons . Hence, i t would seem that repor t ing human c a p i t a l va lues , as Lev and Schwartz have suggested, might provide va luable in format ion . In f a c t , i n t h e i r paper, they argue cogently the merits of human c a p i t a l repor t ing to investors and management, and even suggest a p r a c t i c a l measurement technique by which human c a p i t a l values may be incorporated i n the f i n a n c i a l statements (19). C l e a r l y , d i s c l o s u r e of the types of information ind ica ted above would be necessary to enable an investor to adequately evaluate a company's prospects , and thereby to make investment dec is ions on a more informed bas i s . But the current p r a c t i c e in corporate d i sc lo sure i s considered inadequate from an i n v e s t o r ' s point of view. For example, research and development cos t s , a d v e r t i s i n g expenses, future plans and expectat ions , breakdown of sales and p r o f i t , among other items, are commonly not d i s -c lo sed , although they may be re levant and usefu l to informed 20 d e c i s i o n - m a k i n g . Much of t h e c r i t i c i s m c o n c e r n i n g i n a d e q u a t e c o r -p o r a t e d i s c l o s u r e , however, i s f o c u s e d on the r e p o r t i n g by c o n g l o m e r a t e companies."" Such companies a r e engaged i n o p e r a t i o n s i n w i d e l y d i v e r s i f i e d i n d u s t r i e s w h i c h a r e l i k e -l y t o d i f f e r i n terms o f p r o f i t a b i l i t y , r i s k , and growth p o t e n t i a l . As i n d u s t r y - w i d e p r i c e - e a r n i n g s r a t i o s a r e a f f e c t e d by t h e s e f a c t o r s , i t f o l l o w s t h a t t h e s e r a t i o s may a l s o v a r y among t h e d i f f e r e n t i n d u s t r i e s . S u r e l y , s uch i n f o r m a t i o n i s p e r t i n e n t t o i n v e s t o r s but i t may not be r e v e a l e d i f c o n g l o m e r a t e companies a r e t o r e p o r t o n l y the c o n s o l i d a t e d r e s u l t s of o p e r a t i o n s f o r the o v e r - a l l b u s i -ness a c t i v i t y . I n o t h e r words, the " o v e r a l l f i n a n c i a l r e p o r t s p r e c l u d e judgements of the v a r i o u s i n d u s t r i e s i n w h i c h the c o n g l o m e r a t e o p e r a t e s , and l i m i t i n v e s t m e n t a n a l y -s i s t o the b e h a v i o u r of t h e f i r m as a whole and of i t s management." (20) T h i s may w e l l r e s u l t i n e r r o n e o u s e v a -l u a t i o n made by s e c u r i t i e s a n a l y s t s and i n v e s t o r s , of the i n v e s t m e n t w o r t h of the c o n g l o m e r a t e . d R o b e r t K. Mautz d e f i n e s a c o n g l o m e r a t e as f o l l o w s : A c o n g l o m e r a t e company i s one w h i c h i s so mana-g e r i a l l y d e c e n t r a l i z e d , so l a c k s o p e r a t i o n a l i n t e g r a t i o n , or has so d i v e r s i f i e d markets t h a t i t may e x p e r i e n c e r a t e s of p r o f i t a b i l i t y , degrees of r i s k , and o p p o r t u n i t i e s f o r gr o w t h , w h i c h v a r y w i t h i n the company t o such an e x t e n t t h a t an i n v e s t o r r e q u i r e s i n f o r m a t i o n about t h e s e v a r i a -t i o n s i n o r d e r t o make i n f o r m e d d e c i s i o n s . 21 T h e f o l l o w i n g example by A r k u s - D u n t o v s e r v e s t o i l l u s t r a t e how c o n g l o m e r a t e d i s c l o s u r e on a t o t a l company b a s i s does n o t p e r m i t t h e m aking o f i n f o r m e d d e c i s i o n s ( 2 1 ) : one may t a k e t h e c a s e o f a S I b i l l i o n " c o n g l o m e r a t e " company and, i f one c o u l d have d i s s e c t e d i t s o p e r a - s t i o n s , one w o u l d have f o u n d t h a t i t had a d i v i s i o n h a v i n g a p r o d u c t d i s -t i n c t l y u n r e l a t e d t o t h e m a i n , h i s t o -r i c a l b u s i n e s s o f t h e company and t h a t t h i s d i v i s i o n c o n t r i b u t e d o n l y 5% t o g r o s s r e v e n u e b u t 30% t o p r o f i t s . T h e s e p r o f i t s r e s u l t e d n o t f r o m t h e o u t s t a n d -i n g p e r f o r m a n c e o f t h e p a r t i c u l a r d i v i -s i o n b u t , r a t h e r , f r o m t h e v e r y p o o r p e r f o r m a n c e o f t h e main b u s i n e s s o f t h e company. T h e s e f a c t s , however, were n o t a v a i l a b l e i n p u b l i s h e d r e p o r t s and c o u l d n o t have been d e t e r m i n e d a t t h a t t i m e u n l e s s one were on t h e ' i n s i d e ' o r had t h e b e n e f i t o f i n s i d e i n f o r m a t i o n . An i n v e s t m e n t i n t h e company, t h e r e f o r e , had t o be c o n s i d e r e d on t h e b a s i s o f w h o l l y i n a d e q u a t e i n f o r m a t i o n . I n summing up, f r o m t h e p o i n t o f v i e w o f i n v e s -t o r s and s e c u r i t i e s a n a l y s t s , a r a t i o n a l e o f a d e q u a t e c o r -p o r a t e d i s c l o s u r e i s c l e a r l y t h a t i t p r o v i d e s a b a s i s f o r t h e m a k i n g o f i n f o r m e d i n v e s t m e n t d e c i s i o n s . I n t h i s way, i n v e s t m e n t s may be d i r e c t e d t o where t h e y a r e e x p e c t e d t o g e n e r a t e t h e g r e a t e s t r a t e o f r e t u r n t o t h e i n v e s t o r s . ALLOCATION OF RESOURCES From t h e p o i n t o f v i e w o f c a p i t a l a l l o c a t i o n , f u n d s a r e c o n s i d e r e d t o be a l l o c a t e d t o t h e i r most 22 e f f i c i e n t economic use i f they are d i r e c t e d to p o i n t s of h i g h e s t p r o f i t a b i l i t y . Thus t h i s i s c o n s i s t e n t w i t h an i n v e s t o r ' s c r i t e r i o n of a l l o c a t i n g c a p i t a l which, as i n d i c a t e d i n the p r e c e d i n g s e c t i o n , i s based on a com-p a r i s o n of the e s t i m a t e d f u t u r e p r o f i t a b i l i t y of c a p i t a l among i t s v a r i o u s a l t e r n a t i v e uses. C l e a r l y , e f f i c i e n t a l l o c a t i o n of c a p i t a l r e s o u r c e s i s i m p l i e d s i n c e i n v e s t -ments are made on the b a s i s of the g r e a t e s t expected r a t e of r e t u r n . In other words, " p u r c h a s i n g shares of the com-pany expected to have the h i g h e s t r a t e of r e t u r n i s t a n -tamount to a l l o c a t i n g c a p i t a l to i t s best use from the Q p o i n t of view of the market and the i n v e s t o r . " (22) In f a c t , i t may be s t a t e d t h a t the d e c i s i o n s r e g a r d i n g i n -vestments by i n v e s t o r s , management, and governments are, i n the u l t i m a t e a n a l y s i s , r e s o u r c e a l l o c a t i o n d e c i s i o n s . e George M. S c o t t f u r t h e r e l a b o r a t e s on t h i s p o i n t thus: A s t o c k market, by i n t e r p o s i n g a market mecha-nism between an i n v e s t o r and companies, i n t r o d u c e s the s e c o n d - l e v e l v a r i a b l e of s t o c k movements which are i n d e -pendent of the r e a l o p e r a t i n g p r o s p e c t s of companies. T h i s i n t r o d u c e s c e r t a i n c o m p l e x i t i e s i n t o the s t r a i g h t -forward a n a l y s i s p r e s e n t e d . However, i n g e n e r a l , and p a r t i c u l a r l y i n the long run, the r e s u l t i s the same the most e f f i c i e n t f i r m s p r o v i d i n g the products or s e r -v i c e s most i n demand w i l l be the ones ab l e to secure out-s i d e e q u i t y c a p i t a l from the s t o c k market. T h i s can s t i l l be c o n s i d e r e d as a l l o c a t i n g c a p i t a l to i t s " b e s t use" i n a market and i n v e s t o r sense. See George IV". S c o t t , A c c ounting And D e veloping  N a t i o n s , Graduate S c h o o l of B u s i n e s s A d m i n i s t r a t i o n , U n i v e r s i t y of Washington, S e a t t l e , 1970, p. 50. 23 I n a p r i v a t e e n t e r p r i s e economy, t h e c a p i t a l m a r k e t p r o v i d e s t h e medium t h r o u g h w h i c h c a p i t a l r e s o u r c e s may be a l l o c a t e d among t h e c o m p e t i n g i n v e s t m e n t o p p o r t u -n i t i e s . B u t t h e d e v e l o p m e n t o f a p r o p e r c a p i t a l m a r k e t must s u r e l y depend on a f r e e f l o w o f b r o a d l y - b a s e d s a v i n g s i n t o t h e m a r k e t , and t h i s may be e n c o u r a g e d by c r e a t i n g i n v e s t o r c o n f i d e n c e t h r o u g h a d e q u a t e d i s c l o s u r e o f c o r p o -r a t e i n f o r m a t i o n . T h u s , B n t h o v e n p o i n t s o u t ( 2 3 ) : C o r p o r a t e r e p o r t i n g and d i s c l o -s u r e o f i n f o r m a t i o n t o t h e f i n a n c i a l community p l a y s an i m p o r t a n t p a r t i n b u i l d i n g i n v e s t o r '.confidence and i n -t e r e s t and s t i m u l a t i n g t h e d e v e l o p -ment o f c a p i t a l m a r k e t s many c o u n t r i e s have no p r o p e r c a p i t a l mar-k e t p r e c i s e l y b e c a u s e t h e r e i s no f i n a n c i a l r e p o r t i n g o f a n a t u r e t o g e n e r a t e i n v e s t o r c o n f i d e n c e . F u r t h e r , i f t h e m a r k e t i s t o f u n c t i o n e f f i c i e n t l y as an a l l o c a t o r o f c a p i t a l r e s o u r c e s , t h e r e s h o u l d be a d e -q u a t e c o r p o r a t e i n f o r m a t i o n d i s c l o s e d so t h a t i n d i v i d u a l i n v e s t m e n t d e c i s i o n s c a n be made b a s e d upon i t . F o r , c l e a r l y , " t h e c o l l e c t i v e i n v e s t m e n t j u d g ement t h a t emerges f r o m t h e m a r k e t s i s o n l y as good as t h e i n d i v i d u a l j u d g e -ments t h a t a r e f e d i n t o i t . The more i n f o r m a t i o n t h a t i s made a v a i l a b l e , t h e b e t t e r t h e m a r k e t s w i l l f u n c t i o n i n p e r f o r m i n g t h e i r i m p o r t a n t s o c i a l t a s k . " (24) On t h e o t h e r hand, i f t h e r e i s i n a d e q u a t e d i s -c l o s u r e , a c c o r d i n g t o C o h e n , i n h i s d i s c u s s i o n o f c o n -g l o m e r a t e r e p o r t i n g ( 2 5 ) , 24 t h e r e may be s e r i o u s e r o s i o n o f o u r c a p i t a l m a r k e t s as e f f i c i e n t a l l o c a t o r s o f c o r p o r a t e r e s o u r c e s and o f p u b l i c s a v i n g s when l a r g e e n t e r p r i s e s a r e c o m b i n e d u n d e r common management n o t b e c a u s e t h e i r a c t u a l o p e r a t i o n s go w e l l t o g e t h e r b u t b e c a u s e t h e i r f i n a n -c i a l s t a t e m e n t s l o o k good t o g e t h e r . I n t h e same v e i n , R o s e p o i n t s o u t how s c a r c e c a p i t a l r e s o u r c e s may be m i s - e m p l o y e d as a r e s u l t o f t o o much d i v e r s i f i c a t i o n . T h u s , as r e p o r t e d i n t h e E c o n o m i s t ( 2 6 ) : D i v e r s i f i c a t i o n may l e a d t o t h e g r e a t e r p r o t e c t i o n o f t h e i n t e r e s t s o f t h e managers, w h i l e t h e i n t e r e s t s o f t h e owners w o u l d have been b e t t e r s e r v e d by a h i g h e r r a t e o f d i s t r i b u -t i o n ( o f d i v i d e n d s ) , f r o m w h i c h t h e y c o u l d d i v e r s i f y t h e i r own i n t e r e s t s p r i v a t e l y The ( m a r k e t ) " s y s t e m " i n f a c t c o n t a i n s a b u i l t - i n b i a s w h e r e -by e x c e s s i v e r e s o u r c e s may be c h a n n e l -l e d t o w a r d s e x i s t i n g e s t a b l i s h e d f i r m s w h i c h c a n r e l y on s e l f - f i n a n c i n g and w h i c h can p o t r a y any i n c r e a s e i n e a r n i n g s as an a c h i e v e m e n t a t t h e e x p e n s e o f t h o s e t h a t r e l y on new i s s u e s , e v e n t h o u g h t h e l a t t e r may have t h e more p r o m i s i n g p r o s p e c t s o f s e c u r i n g a h i g h r e t u r n on t h o s e r e s o u r c e s . Hence, R o s e a d v o c a t e s g r e a t e r c o r p o r a t e d i s c l o -s u r e o f i n f o r m a t i o n so t h a t s t o c k h o l d e r s and f i n a n c i a l a n a l y s t s may be a b l e t o i d e n t i f y t h o s e s i t u a t i o n s where c a p i t a l r e s o u r c e s a r e b e i n g m i s a l l o c a t e d ( 2 7 ) . M o r e o v e r , he a r g u e s , " o n l y w i t h a d e q u a t e p u b l i c i t y can t h e p r o p o n e n t s o f t h e m a r k e t s y s t e m o f a l l o c a t i n g c a p i t a l r e s o u r c e s c l a i m t h a t t h e s y s t e m l e a d s t o a b e t t e r a l l o c a t i o n o f r e s o u r c e s t h a n w o u l d be s e c u r e d by c e n t r a l d i r e c t i o n . " (28) 25 The q u e s t i o n o f e f f i c i e n t a l l o c a t i o n o f e c o n o m i c r e s o u r c e s , p a r t i c u l a r l y w i t h r e s p e c t t o c a p i t a l , i s e s p e -c i a l l y i m p o r t a n t t o t h e g o v e r n m e n t s o f l e s s d e v e l o p e d c o u n -t r i e s upon whom l a r g e l y r e s t s t h e r e s p o n s i b i l i t y f o r t h e i r c o u n t r i e s ' e c o n o m i c d e v e l o p m e n t . One o f t h e m a j o r i m p e d i -ments t o t h e d e v e l o p m e n t o f t h e s e c o u n t r i e s , f o r e x a m p l e , i s t h e s c a r c i t y o f c a p i t a l . C l e a r l y , i f r e s o u r c e s f o r d e v e l o p m e n t a r e l i m i t e d , t h e n t h e need t o u t i l i s e t h e a v a i l -a b l e r e s o u r c e s most p r o f i t a b l y becomes a l l t h e more i m p o r -t a n t . S c o t t c o n t e n d s t h a t t h i s may be a c h i e v e d by means o f g r e a t e r d i s c l o s u r e o f i n f o r m a t i o n by c o r p o r a t i o n s i n t h e p r i v a t e s e c t o r . T h u s , s u c h c o r p o r a t e i n f o r m a t i o n as t h e maximum p r o d u c t i o n c a p a c i t y and a c t u a l p r o d u c t i o n , i f t h e y a r e made a v a i l a b l e , may be u s e f u l f o r d e t e r m i n i n g " t h e o p p o r t u n i t y c o s t o f i d l e c a p a c i t y " (29) o r , as M u e l l e r p u t s i t , f o r m e a s u r i n g " t h e w a s t e o f r e s o u r c e s . " (30) I n t h i s way, t h e g o v e r n m e n t s i n t h e s e c o u n t r i e s w o u l d be a b l e t o " d e t e r m i n e t h e e x t e n t t o w h i c h p a r t i c u l a r s e c t o r s c o u l d expand w i t h o u t f u r t h e r i n v e s t m e n t a l l o c a t i o n s Or, t h e g o v e r n m e n t c o u l d c i r c u l a t e t h i s i n f o r m a t i o n back t o p r i v a t e s e c t o r s as a n o t h e r i n d e x o f o p p o r t u n i t y i f f i r m s i n t h e i n d u s t r y have e x c e s s c a p a c i t y , t h e r e may be l i t t l e o p p o r t u n i t y f o r new i n v e s t m e n t . " (31) I t i s c l e a r , f r o m t h e f o r e g o i n g d i s c u s s i o n , t h a t e x t e n s i v e c o r p o r a t e d i s c l o s u r e i s d e s i r a b l e t o e n c o u r a g e 26 the development of the c a p i t a l market, and thereby to a s s i s t i n a b e t t e r a l l o c a t i o n of c a p i t a l r e s o u r c e s . I t i s a l s o c l e a r t h a t , i f the r e s o u r c e a l l o c a t i o n d e c i s i o n s of i n v e s t o r s , management, and governments are made on the b a s i s of inadequate i n f o r m a t i o n , as i s o f t e n the case i n the l e s s developed c o u n t r i e s w i t h t h e i r low l e v e l of accoun-t i n g development, then "the p r o b a b i l i t y of m i s d i r e c t e d e f f o r t , wasted r e s o u r c e s , and economic l o s s i s i n c r e a s e d . " ( 3 2 ) N E E D FOR C A P I T A L One of the main c h a r a c t e r i s t i c s of the p r i v a t e e n t e r p r i s e economy i s perhaps i t s broad base of f i n a n c i a l r e s o u r c e s . O b v i o u s l y , the emergence of the c o r p o r a t i o n as a form of b u s i n e s s e n t e r p r i s e has made t h i s p o s s i b l e . Thus, by means of f l o a t i n g shares or i s s u i n g of bonds and debentures, the c a p a c i t y of a c o r p o r a t i o n to tap huge accumulations of c a p i t a l from w i d e l y d i s p e r s e d sources i s almost u n l i m i t e d . Mahon p o i n t s out t h a t , by i n v e s t i n g t h i s c a p i t a l i n p l a n t and equipment, as w e l l as i n work-in g c a p i t a l funds, i t enables the c o r p o r a t i o n to c o n t r i -bute i m p o r t a n t l y to the i n c r e a s e i n the volume of output and p r o d u c t i v i t y of American i n d u s t r y (33). In the U n i t e d S t a t e s , c o r p o r a t e c a p i t a l i s p r o v i d e d by some t h i r t y m i l l i o n s t o c k h o l d e r s w h i l e another one hundred m i l l i o n are e s t i m a t e d to have c o n t r i b u t e d 27 i n d i r e c t l y t h r o u g h i n v e s t i n g i n i n s t i t u t i o n s , v i z . , b a n k s , i n s u r a n c e c o m p a n i e s , p e n s i o n f u n d s , m u t u a l f u n d s , e t c . (34) T o g e t h e r , t h e y r e p r e s e n t a c o n s i d e r a b l e p r o p o r t i o n o f t h e A m e r i c a n p u b l i c and, as p r o v i d e r s o f a s c a r c e p r o d u c t i v e r e s o u r c e , t h e y must c e r t a i n l y p l a y a d o m i n a n t r o l e i n a f f e c t i n g t h e f u t u r e o f b u s i n e s s e n t e r p r i s e and t h e p r o -g r e s s o f t h e p r i v a t e - e n t e r p r i s e economy ( w h i c h i s i n f a c t c o r p o r a t i o n - d o m i n a t e d ) . A d m i t t e d l y , one may a r g u e on t h e g r o u n d s t h a t , s i n c e o w n e r s h i p i s d i v o r c e d f r o m management, t h e r e may be some w e a k e n i n g o f c o n t r o l by e x i s t i n g s t o c k h o l d e r s o v e r t h e i r p a s t c o n t r i b u t i o n s o f c a p i t a l and t h a t , c o r p o r a t i o n s a r e i n c r e a s i n g l y r e l y i n g upon r e t a i n e d e a r n i n g s as an i m p o r t a n t s o u r c e o f f u n d s . N e v e r t h e l e s s , i t c a n n o t be d e n i e d t h a t c o r p o r a t i o n s must s t i l l c o n t i n u e t o depend on e x t e r n a l s o u r c e s t o meet t h e i r f u t u r e c a p i t a l n e e d s f o r e x p a n s i o n and o t h e r o p e r a t i o n s . W h i l e t h e o r e c t i c a l l y a c o r p o r a t i o n may r a i s e any amount o f c a p i t a l r e q u i r e d t o s u p p o r t i t s volume o f o p e r a t i o n s , i n p r a c t i c e t h e amount o f c a p i t a l i t i s a b l e t o a t t r a c t i s c l o s e l y r e l a t e d t o t h e e x t e n t o f c o r p o r a t e d i s c l o s u r e . T h i s i s n o t an u n r e a s o n a b l e a s s u m p t i o n f o r , c l e a r l y , " t h e w i l l i n g n e s s o f t h e m u l t i t u d e o f d i s t a n t i n v e s t o r s t o s u p p l y t h e c a p i t a l must r e s t t o a l a r g e e x t e n t on t h e i r c o n f i d e n c e t h a t , when t h e c o r p o r a t e f i n a n c i a l r e p o r t a r r i v e s , i t w i l l c o n t a i n a f u l l and f a i r p r e s e n t a -28 t i o n o f t h e f i n a n c i a l p o s i t i o n o f t h e c o r p o r a t i o n and t h e r e s u l t s o f i t s o p e r a t i o n s good o r bad." (35) The same t h o u g h t s were p r o b a b l y b e t t e r e x p r e s s e d by C a r e y as f o l l o w s ( 3 6 ) : A s a t i s f a c t o r y s y s t e m f o r commu-n i c a t i n g f i n a n c i a l and o t h e r e c o n o m i c d a t a i s an e s s e n t i a l c o n d i t i o n f o r t h e a c c u m u l a t i o n o f c a p i t a l f r o m w i d e s p r e a d s o u r c e s i n s i n g l e e n t e r p r i s e s , t h a t i s , f o r a s u c c e s s f u l i n d u s t r i a l economy. P e r s o n s who have an i n t e r e s t i n r e s o u r c e s a r e i n v a r i o u s s t a g e s o f r e m o t e n e s s f r o m them and f r o m t h e f a c t o r s a f f e c t i n g them. The g r e a t e r t h i s r e m o t e n e s s , t h e g r e a t e r t h e need f o r c o m m u n i c a t i o n o f d a t a I n f a c t , w i t h o u t a s s u r a n c e o f r e l i a b l e e c o n o m i c d a t a , t h e r e m o t e i n v e s t o r o r c r e d i t o r p r o b a b l y w o u l d n o t s u p p l y c a p i -t a l t o t h e e n t e r p r i s e . The i m p o r t a n c e o f a d e q u a t e c o r p o r a t e d i s c l o s u r e i n r e l a t i o n t o a c o r p o r a t i o n ' s n e e d f o r c a p i t a l i s a l s o c l e a r l y i m p l i e d by S c o t t i n h i s d i s c u s s i o n o f e x t e r n a l r e p o r t i n g i n d e v e l o p i n g n a t i o n s ( 3 7 ) : E x t e r n a l r e p o r t i n g i n d e v e l o p -i n g n a t i o n s o f t e n p r o v i d e l i t t l e i n f o r m a t i o n r e l e v a n t t o i n v e s t m e n t d e c i s i o n s , and i n v e s t o r s a r e u n c e r t a i n a b o u t t h e r e l i a b i l i t y o f t h e i n f o r m a -t i o n g i v e n . As a c o n s e q u e n c e , i n v e s -t o r s a r e d i s i n c l i n e d t o p r o v i d e t h e c a p i t a l n e e d e d i n an e x p a n d i n g economy. S i n g h v i , i n h i s d i s c u s s i o n o f c o r p o r a t e d i s c l o -f s u r e i n I n d i a , p r o v i d e s a good e x a m p l e . (38) He o b s e r v e s t h a t f o r e i g n e n t e r p r i s e s i n I n d i a t e n d t o d i s c l o s e more 29 e x t e n s i v e l y a n d t h i s e x p l a i n s , i n p a r t a t l e a s t , t h e o v e r -s u b s c r i p t i o n o f i s s u e s o f t h e s e c o m p a n i e s . On t h e o t h e r h a n d , d o m e s t i c I n d i a n e n t e r p r i s e s d i s c l o s e o n l y s c a n t i l y a b o u t t h e i r o p e r a t i o n s ; c o n s e q u e n t l y , I n d i a n i n v e s t o r s t e n d t o a v o i d c o m m i t t i n g t h e i r f u n d s i n s u c h c o m p a n i e s . T h r o u g h a d e q u a t e c o r p o r a t e d i s c l o s u r e , a c o r -p o r a t i o n may n o t o n l y be a b l e t o a t t r a c t e q u i t y c a p i t a l r e l a t i v e l y more e a s i l y , a s i s s u g g e s t e d i n t h e f o r e g o i n g d i s c u s s i o n , i t may a l s o be a b l e t o o b t a i n l o a n c a p i t a l a t a much l o w e r c o s t v i s - a - v i s a n o t h e r c o r p o r a t i o n w h i c h m a i n t a i n s a p o l i c y o f i n f o r m a t i o n s e c r e c y , g i v e n t h a t a l l o t h e r t h i n g s r e m a i n t h e same. I n t h i s c o n n e c t i o n , t h e l i n e o f r e a s o n i n g a s p u t f o r w a r d by Summers w i l l be t h e b a s i s o f t h e d i s c u s s i o n t h a t f o l l o w s ( 3 9 ) . T h u s , i f t h e i n f o r m a t i o n d i s c l o s e d i n an a u d i t e d p u b l i s h e d r e p o r t p r o v i d e s a g u i d e t o c r e d i t g r a n t o r s i n f See a l s o S u r e n d r a S i n g h v i , " I n d i a ' s F e e b l e F i n a n -c i a l S t a t e m e n t s , " C o l u m b i a J o u r n a l o f W o r l d B u s i n e s s , N o v e m b e r - D e c e m b e r , 1 9 6 7 , pp. 5 5 - 6 0 . g I t s h o u l d be n o t e d t h a t , i n p o i n t o f f a c t , Summers u s e s t h e t e r m s , " g o o d f i n a n c i a l s t a t e m e n t s " and " b a d f i n a n c i a l s t a t e m e n t s " . H o w e v e r , i t may be i n t e r -p r e t e d f r o m t h e c o n t e x t t o mean, i n e f f e c t , " a d e q u a t e d i s c l o s u r e " a n d " i n a d e q u a t e d i s c l o s u r e " r e s p e c t i v e l y . 30 m a k i n g l e n d i n g d e c i s i o n s , t h e n c l e a r l y , where d i s c l o s u r e i s c o n s i d e r e d i n a d e q u a t e , c r e d i t g r a n t o r s w i l l be l e s s i n f o r m e d , o r t o p u t i t i n a n o t h e r way, t h e y a r e s a i d t o be more i g n o r a n t w i t h r e g a r d t o a c o r p o r a t i o n ' s a c t i v i t i e s . I t i s t h i s i g n o r a n c e , on a c c o u n t o f i n a d e q u a t e d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n , w h i c h g i v e s r i s e t o u n c e r t a i n t y r e g a r d i n g t h e b o r r o w i n g c o r p o r a t i o n ' s a b i l i t y t o l a t e r d i s c h a r g e i t s d e b t o b l i g a t i o n s . T h i s means t h a t , i f a l o a n i s e x t e n d e d t o a c o r p o r a t i o n w h i c h d i s c l o s e s r e l a t i v e -l y l i t t l e i n f o r m a t i o n , t h e c r e d i t g r a n t o r w o u l d e x p e c t a h i g h e r r e t u r n w h i c h , i n p a r t , r e p r e s e n t s a c o m p e n s a t i o n f o r u n c e r t a i n t y . Of c o u r s e , e a c h c r e d i t g r a n t o r has a maximum a c c e p t a b l e r i s k . Where t h e r i s k i s g r e a t e r t h a n t h i s , he may n o t c o n s i d e r t h e l o a n r e g a r d l e s s o f t h e r e t u r n . T h i s i g n o r a n c e t h u s c a n be bought a t a p r i c e a h i g h e r c o s t t o t h e c o r p o r a t i o n f o r i t s l o a n c a p i t a l . A s s u m i n g t h a t t h e g o a l o f t h e c o r p o r a t i o n i s t o m a x i m i z e i t s p r o f i t s , t h e n i t w o u l d n a t u r a l l y want t o m i n i m i z e i t s c o s t s . T h i s means p a y i n g t h e l o w e s t p o s s i b l e p r i c e s f o r t h e r e s o u r c e s i t must a c q u i r e as o p e r a t i o n a l i n p u t s , one o f w h i c h i s o b v i o u s l y c a p i t a l . T h i s w o u l d be l i k e l y t h e c a s e i f a c o r p o r a t i o n makes a v a i l a b l e more i n f o r m a t i o n f o r , w i t h more e x t e n s i v e c o r p o r a t e d i s c l o s u r e , t h e l e s s r e t u r n w i l l be e x p e c t e d by c r e d i t g r a n t o r s p u r e l y as a c o m p e n s a t i o n f o r u n c e r t a i n t y . 31 T h e a d v a n t a g e t o a c o r p o r a t i o n o f f u l l d i s c l o s u r e i s t h u s c l e a r f r o m t h e p o i n t o f v i e w o f i t s need f o r c a p i -t a l . F i r s t , e q u i t y c a p i t a l may be r a i s e d more e a s i l y and s e c o n d , l o a n c a p i t a l may be o b t a i n e d more c h e a p l y , assum-i n g o t h e r t h i n g s b e i n g e q u a l . S T A B I L I T Y IN SECURITIES MARKET Any u n u s u a l a c t i v i t y w h i c h r e s u l t s i n w i l d f l u c -t u a t i o n s i n t h e p r i c e s o f a c o r p o r a t i o n ' s s t o c k i s u ndoub-t e d l y u n h e a l t h y t o t h e c o r p o r a t i o n i n p a r t i c u l a r , and t o • i t h e s e c u r i t i e s m a r k e t and t h e economy i n g e n e r a l , e s p e c i a l l y when t h i s h appens t o t h e s t o c k o f a m a j o r c o r p o r a t i o n . T h u s , a more r a t i o n a l l e v e l o f s t o c k p r i c e s i s r e q u i r e d i f g r e a t e r s t a b i l i t y i n t h e s e c u r i t i e s m a r k e t i s t o be a c h i e v e d . S t i g l e r e x p l a i n s t h a t " p r i c e d i s p e r s i o n i s a m a n i f e s t a t i o n and, i n d e e d , i t i s a measure o f i g n o -r a n c e i n t h e m a r k e t . " (40) C l e a r l y , i g n o r a n c e i n t h e m a r k e t i s a c o n s e q u e n c e o f i n a d e q u a t e d i s c l o s u r e f o r , i f t h e r e i s a d e q u a t e d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n , m a r k e t i g n o r a n c e may be m i n i m i z e d and, c o n s e q u e n t l y , t h e p r i c e d i s p e r s i o n i s l i k e l y t o be n a r r o w e r . T h i s has been d e m o n s t r a t e d e m p i r i c a l l y i n a s t u d y by S i n g h v i and D e s a i ( 4 1 ) . F r i e n d and Herman p o i n t o u t t h e m e r i t o f f u l l d i s c l o s u r e i n t h i s c o n n e c t i o n as f o l l o w s ( 4 2 ) : 32 W i t h f u l l d i s c l o s u r e we w o u l d e x p e c t l e s s d r a s t i c s h i f t s i n e s t i m a t e s o f e x p e c t e d p r o f i t a b i l i t y o f a g i v e n i s s u e as a r e s u l t o f t h e g r e a t e r i n i -t i a l l e v e l o f e c o n o m i c i n f o r m a t i o n ( a n d , p r e s u m a b l y , t h e r e d u c t i o n i n t h e p o s s i b i l i t y o f s u r p r i s e s f r o m t h i s s o u r c e ) , a g r e a t e r s c o p e f o r s c i e n t i f i c i n v e s t m e n t a n a l y s i s , a d i m i n i s h e d r e l i a n c e on and u s e o f rumour, and a r e d u c t i o n i n t h e s c a l e o f m a n i p u l a t i v e p r a c t i c e s . T h u s , f l u c t u a t i o n s i n t h e s e c u r i t y p r i c e s a r e l i k e l y t o be s m a l l e r t h a n i n t h e a b s e n c e o f a d e q u a t e i n f o r m a t i o n ; i m p l i c i t l y , t h i s means g r e a t e r s t a b i l i t y f o r t h e s e c u r i t i e s m a r k e t . I t m i g h t a l s o be n o t e d t h a t d i s l o c a t i o n s i n t h e i s e c u r i t i e s m a r k e t s w h i c h l e d t o t h e g r e a t s t o c k m a r k e t c r a s h i n 1929 and w h i c h r e s u l t e d i n he a v y l o s s e s t o many i n v e s t o r s was, i n p a r t , a t t r i b u t a b l e t o t h e l a c k o f p r o p e r d i s c l o s u r e by c o r p o r a t i o n s (43.$. T h u s , B i s s e l l o b s e r v e s t h a t (44): At t h a t t i m e p u b l i c k n o w l e d g e o f c o r p o r a t e h a p p e n i n g s was a l m o s t n o n - e x i s t e n t , and t r a i n e d p r o f e s s i o n a l i n t e r p r e t a t i o n was n o t g e n e r a l l y a v a i l a b l e t o t h e p u b l i c . A c c o r d i n g l y , t h e r e was no e f f e c t i v e way t o p r e v e n t d i s l o c a t i o n s i n s e c u r i t i e s m a r k e t s f r o m t i p s and r u m o u r s . To c o n t r i b u t e t o a r e t u r n t o t h e c i r c u m s t a n c e s o f t h o s e d a y s by s u b s t a n t i a l l y r e d u c i n g t h e f l o w o f a p p r o -p r i a t e c o r p o r a t e i n f o r m a t i o n i s u n c o n s c i o n -a b l e . The same o b s e r v a t i o n was a l s o made by K o h l e r 33 and M a t a z i n r e s p e c t o f S w i s s d i s c l o s u r e p r a c t i c e s ( 4 S ) : ...... P r e s e n t a c c o u n t i n g and d i s c l o s u r e p r a c t i c e s ^ and t h e f r e e d o m o f management f r o m e x t e r n a l s c r u t i n y , may have been c o n t r i b u t o r y t o some o f t h e s p e c t a c u l a r f i n a n c i a l c r i s e s and f a i l u r e s o f S w i s s c o m p a n i e s . In r e c e n t y e a r s s e v e r a l m e d i u m - s i z e d c o m p a n i e s have been f o u n d , u n e x p e c t e d l y i n d i f f i c u l t i e s S u c h e v e n t s have l e d t o p a n i c s a l e s on t h e e x c h a n g e s I t i s w i d e l y b e l i e v e d t h a t f u l l e r d i s c l o s u r e w o u l d have made p o s s i b l e e a r l i e r d e t e c t i o n o f d i f f i c u l -t i e s and e a r l i e r c o r r e c t i v e m e a s u r e s . The q u e s t i o n o f t i m e l y d i s c l o s u r e i s e s p e c i a l l y i m p o r t a n t i n c o n s i d e r i n g s t a b i l i t y i n t h e s e c u r i t i e s m a r k e t . M a j o r d e v e l o p m e n t s r e l a t i n g t o a c o r p o r a t i o n do n o t n e c e s s a r i l y t a k e p l a c e a t t h e same t i m e as when t h e c o r p o r a t i o n ' s a n n u a l r e p o r t i s b e i n g p r e p a r e d . So i t may be n e c e s s a r y f o r t h e c o r p o r a t i o n t o d i s c l o s e any s u c h news b e f o r e t h e a n n u a l r e p o r t i s i s s u e d . T h u s , by t i m e l y d i s c l o s u r e i s meant i m m e d i a c y i n t h e d i s s e m i n a t i o n o f c o r p o r a t e i n f o r m a t i o n where s u c h i n f o r m a t i o n i s e x p e c t e d t o have a s e r i o u s i m p a c t on t h e c u r r e n t m a r k e t p r i c e s o f s e c u r i t i e s . E x a m p l e s o f m a j o r d e v e l o p m e n t s i n a c o r p o r a t i o n t h a t a r e l i k e l y t o a f f e c t t h e t r a d i n g a c t i v i t y o f t h e c o r -p o r a t i o n ' s s t o c k and m a r k e t s t a b i l i t y , and t h e r e f o r e r e q u i r e t i m e l y d i s c l o s u r e , c a r e ( 4 6 ) : (a) S h a r p c h a n g e s i n e a r n i n g s o u t l o o k ; 34 (b) D i v i d e n d d e c l a r a t i o n s ; ( c ) M e r g e r s and m a j o r a c q u i s i t i o n s ; (d) B r e a k t h r o u g h s i n r e s e a r c h , p r o d u c t d e v e l o p -ment, o r p r o d u c t t e c h n o l o g y ; (e) Awards o f major c o n t r a c t s ; ( f ) M a j o r c h a n g e s i n a s s e t v a l u e s , i n c l u d i n g n a t u r a l r e s o u r c e s d i s c o v e r y ; (g) C h a n g e s i n t o p management. C l e a r l y , t h e s e a r e s i g n i f i c a n t e v e n t s w h i c h c a n have an i m p o r t a n t b e a r i n g on a c o r p o r a t i o n ' s f u t u r e p r o f i t -a b i l i t y and w h i c h , t h e r e f o r e , a r e l i k e l y t o i n f l u e n c e t h e c u r r e n t s t o c k p r i c e s . B u t t i m e l y d i s c l o s u r e , by c h e c k i n g a g a i n s t r u m o u r s and s p e c u l a t i v e d e a l i n g s , " e n s u r e s t h a t c u r r e n t m a r k e t p r i c e s a r e b a s e d on u p - t o - d a t e i n f o r m a t i o n t h a t has been made a v a i l a b l e t o b o t h b u y e r and s e l l e r . " (47) By w i t h h o l d i n g t h e t y p e s o f i n f o r m a t i o n m e n t i o n e d above o r d e l a y i n g t h e i r d i s c l o s u r e , a c o r p o r a t i o n may e n -c o u r a g e t h e c r e a t i n g o f what i s t e r m e d as an " i n s i d e r g r o u p . " B u r s o n d e f i n e s an i n s i d e r as ( 4 8 ) : anyone w i t h s i g n i f i c a n t , c o n f i d e n -t i a l i n f o r m a t i o n a b o u t a c o r p o r a t i o n . T h i s c e r t a i n l y i n c l u d e s t o p o r m i d d l e management. I t s h o u l d a l s o i n c l u d e t h e c o r p o r a t i o n ' s l e g a l c o u n s e l , p u b l i c r e l a t i o n s c o u n s e l , c e r t i f i e d p u b l i c a c c o u n t a n t s , and o t h e r c o n s u l t a n t s , i n -s i d e and o u t . I t may be added t h a t , i n some c a s e s , ^an_ L i h f luen.-35 t i a l g r o u p o f s t o c k h o l d e r s , u s u a l l y m a j o r s t o c k h o l d e r s , may a l s o have p r e f e r e n t i a l a c c e s s t o i n s i d e i n f o r m a t i o n . M o r e o v e r , c o r p o r a t e management may t e n d t o f a v o u r some f i n a n c i a l a n a l y s t s o v e r o t h e r s i n t h e d i s c l o s u r e o f i m p o r -t a n t i n f o r m a t i o n , e s p e c i a l l y t h o s e a n a l y s t s "who have c r e a t e d good i m p r e s s i o n s v i a f a v o u r a b l e company w r i t e -u p s . " ( 4 f ) I t i s r e a s o n a b l e t o e x p e c t t h a t anyone o f t h e s e i n s i d e r s may t a k e a d v a n t a g e o f t h e v a l u a b l e i n f o r m a t i o n a b o u t a c o r p o r a t i o n , by b u y i n g up a d d i t i o n a l o r d i s p o s i n g o f h i s e x i s t i n g s t o c k , a c c o r d i n g t o t h e c o r p o r a t i o n ' s e a r n i n g s p r o s p e c t s i n t h e l i g h t o f t h e new d e v e l o p m e n t s . S u r e l y , s u c h " t r a d i n g a d v a n t a g e s f o r t h e f a v o u r e d few and c o n f i d e n c e o f t h e e n t i r e i n v e s t i n g p u b l i c a r e n o t compa-t i b l e . " (50) I n f a c t , by t h e i r m a n i p u l a t i o n s o f t h e s t o c k s , i t i s l i k e l y t h a t t h e y may u n d e r m i n e i n v e s t o r c o n -f i d e n c e and s t a b i l i t y i n t h e s e c u r i t i e s m a r k e t . B u t i t must be a d m i t t e d t h a t i n s i d e i n f o r m a t i o n w i l l a l w a y s be a v a i l a b l e t o some p e o p l e ; h e n c e , t i m e l y d i s c l o s u r e i s so i m p o r t a n t . F e u r s t e i n ' s r e f e r e n c e t o t h e A m e r i c a n s e c u r i t i e s m a r k e t s sums up v e r y w e l l t h e c a s e f o r t i m e l y and a d e q u a t e c o r p o r a t e d i s c l o s u r e . He o b s e r v e s t h a t , b e c a u s e o f t h e more e x t e n s i v e d i s c l o s u r e p r a c t i s e d by c o r p o r a t i o n s i n t h e U n i t e d S t a t e s , A m e r i c a n s e c u r i t i e s m a r k e t s a r e r e l a -36 t i v e l y more s t a b l e and more a c t i v e v i s - a - v i s t h o s e e l s e -where and, f o r t h i s r e a s o n , t h e y a r e a b l e t o a t t r a c t a l a r g e v o lume o f f o r e i g n i n v e s t m e n t c a p i t a l i n t o t h e c o u n t r y . T h u s , L a s t y e a r , f o r e x a m p l e , n e t p u r c h a s e s o f U n i t e d S t a t e s e q u i t y s e c u r i t i e s by f o r e i g n e r s were f2.269 b i l l i o n . I t i s no a c c i d e n t t h a t t h e h e a l t h i e s t s e c u r i t i e s m a r k e t s and t h e g r e a t e s t d e g r e e o f p u b l i c p a r t i c i p a t i o n a r e f o u n d i n t h e U n i t e d S t a t e s , where d i s c l o s u r e c o n c e p t s a r e most e f f e c t i v e -l y a d m i n i s t e r e d (51). ACCOUNTING FOR STEWARDSHIP S i n c e , i n t h e c o r p o r a t e f o r m o f b u s i n e s s e n t e r -p r i s e , a c t i v e c o n t r o l and d i r e c t i o n o f t h e c o r p o r a t i o n a r e v e s t e d i n t h e b o a r d o f d i r e c t o r s and management w h e r e -as t h e owners ( i . e . s t o c k h o l d e r s ) m e r e l y p r o v i d e t h e e s s e n t i a l c a p i t a l r e s o u r c e s , t h e r e i s t h u s e s t a b l i s h e d a f i d u c i a r y r e l a t i o n s h i p between them. I n o t h e r w o r d s , t h e b o a r d o f d i r e c t o r s and management a r e a c t i n g as s t e w a r d s f o r t h e s t o c k h o l d e r s i n t h e a d m i n i s t r a t i o n o f c o r p o r a t e a s s e t s w h i c h have been a c q u i r e d o u t o f t h e c a p i t a l s u p p l i e d by t h e s t o c k h o l d e r s . T h u s , B e v i s w r i t e s (52): S o c i e t y ( m e a n i n g t h e w i d e l y -d i s p e r s e d s t o c k h o l d e r s ) h a s , i n g e n e r a l , a s s i g n e d t o c o r p o r a t e d i r e c t o r s and management t h e r e s p o n s i b i l i t y o f em-p l o y i n g r e s o u r c e s g a i n f u l l y ; a f t e r d e l e -3 7 g a t i n g commensurate d i s c r e t i o n a r y a u t h o -r i t y o v e r t h e u t i l i z a t i o n o f c a p i t a l , s o c i e t y e x p e c t s , and r e c e i v e s , t h e a c c o u n -t i n g t o w h i c h i t i s e n t i t l e d . T h a t i s t o s a y , i n a c c o u n t i n g f o r t h i s s t e w a r d -s h i p , t h e d i r e c t o r s and management a r e r e q u i r e d t o r e p o r t t o t h e a b s e n t e e s t o c k h o l d e r s on t h e a f f a i r s o f t h e c o r -p o r a t i o n . I t i s t h e r e f o r e n o t s u r p r i s i n g t h a t , h i s t o r i -c a l l y , f i n a n c i a l s t a t e m e n t s have been r e g a r d e d as a r e p o r t o f s t e w a r d s h i p t o t h e s t o c k h o l d e r s by management f o r t h e a s s e t s , c a p i t a l , and b u s i n e s s e n t r u s t e d t o i t s c a r e . Cohen p o i n t s o u t , i n h i s d i s c u s s i o n o f c o n g l o -m e r a t e r e p o r t i n g , t h e i m p o r t a n c e o f t h i s a c c o u n t i n g f o r s t e w a r d s h i p as a s a f e g u a r d o f t h e i n t e r e s t s o f t h e s t o c k -h o l d e r s . Q u o t i n g him ( 5 3 ) : I t ( d i v i s i o n a l d i s c l o s u r e ) s e r v e s as an i m p o r t a n t c o n t r o l on c o r p o r a t e managers by r e q u i r i n g them t o j u s t i f y t h e r e s u l t s o f t h e i r s t e w a r d s h i p . T h e r e may be d i v e r s i f i e d c o m p a n i e s w h i c h a r e m a i n t a i n i n g l o w - p r o f i t o r m o n e y - l o s i n g o p e r a t i o n s w h i c h w o u l d n o t be p e r s u a s i v e t o s t o c k h o l d e r s and r e q u i r i n g s e p a r a t e d i s c l o s u r e m i g h t w e l l r e s u l t i n t h e i m p r o v e m e n t o r e l i m i n a t i o n o f t h e s u b s t a n d a r d o p e r a t i o n , t o t h e u l t i -mate b e n e f i t o f t h e s t o c k h o l d e r s . T h u s , i t i s r e a s o n a b l e t o c o n c l u d e t h a t , by management's a c c o u n t i n g f o r s t e w a r d s h i p t h r o u g h f u l l d i s -c l o s u r e i n a n n u a l r e p o r t s , s t o c k h o l d e r s a r e b e t t e r a s s u r e d t h a t t h e i r c o n t r i b u t i o n s o f c a p i t a l a r e b e i n g p r o p e r l y u t i l i z e d t o t h e i r b e n e f i t . 38 SAVINGS ON TIME AND EXPENSE Under t h e p r o v i s i o n s o f t h e S e c u r i t i e s and E x -c h a n g e C o m m i s s i o n i n t h e U n i t e d S t a t e s , a l l l i s t e d c o r -p o r a t i o n s a r e r e q u i r e d t o d i s c l o s e i n f o r m a t i o n t o (a) t h e c o m m i s s i o n t h r o u g h what i s d e s c r i b e d as IO-K r e p o r t s , and (b) s t o c k h o l d e r s as w e l l as o t h e r s , i n c o n v e n t i o n a l a u d i t e d a n n u a l r e p o r t s . E m p i r i c a l s t u d i e s ( 54 ) c o n d u c t e d , however, have c o n c l u d e d t h a t i m p o r t a n t d i v e r g e n c e s i n d i s c l o s u r e e x i s t between t h e two s e t s o f r e p o r t s , and t h a t i n g e n e r a l , t h e r e p o r t s f i l e d w i t h t h e S.E.C. t e n d t o c o n -t a i n more d e t a i l s and t h e r e f o r e , a r e more i n f o r m a t i v e v i s - a - v i s t h e s t o c k h o l d e r s * r e p o r t s . A number o f r e a s o n s have been s u g g e s t e d by way o f e x p l a n a t i o n ( 5 5 ) : (a) As a r e s u l t o f t h e d i v e r s i t y o f g e n e r a l l y a c c e p t e d a c c o u n t i n g p r a c t i c e s , a c c o u n t i n g methods p r e s c r i b e d by t h e S.E.C. may w e l l be d i f f e r e n t f r o m t h o s e s u b s c r i b e d t o by a f i r m ' s p u b l i c a c c o u n t a n t s . (b) T he S.E.C. f o r m s r e q u e s t f a r more d e t a i l e d d a t a , d i s c l o s u r e o f w h i c h i s m a n d a t o r y . ( c ) D i f f e r e n c e s and d i f f i c u l t i e s i n i n t e r p r e t a -t i o n and a p p l i c a t i o n o f t h e c o n c e p t o f m a t e r i a l i t y " have a l s o l e d t o o m m i s s i o n s i n p u b l i s h e d r e p o r t s . 3 9 (d) Most c o r p o r a t i o n s are i n c l i n e d to the view t h a t the l e s s i n f o r m a t i o n t h a t i s d i s c l o s e d , the l e s s exposed they are to the r i s k of l i t i g a t i o n . 1 S i n c e i n f o r m a t i o n d i s c l o s e d i n the I O - K r e p o r t s i s more comprehensive, i t i s to be expected t h a t these r e p o r t s are p r e f e r r e d by the most s p e c i a l i s e d s e c u r i t i e s a n a l y s t s , the most thorough i n v e s t o r i n f o r m a t i o n s e r v i c e s , c o m p e t i t o r s , p u b l i c a c c o u n t i n g f i r m s , academic r e s e a r c h e r s , and i n d i v i d u a l s ( 5 6 ) . But although the r e p o r t s are a v a i l -a ble to a l l , they are u n f o r t u n a t e l y not e a s i l y a c c e s s i b l e . ^ As p o i n t e d out by A l b r e c h t , p u b l i c i n s p e c t i o n of these h T h i s w i l l be d i s c u s s e d i n g r e a t e r d e t a i l i n the f o l l o w i n g c h a p t e r . i See i n f r a , pp. 1 0 4 - 1 0 5 . j M u e l l e r makes a s i m i l a r comment w i t h r e g a r d to a c c o u n t i n g p r a c t i c e s i n West Germany. German companies are r e q u i r e d to w r i t e annual bu s i n e s s r e p o r t s which are intended p a r t l y to e x p l a i n the f i n a n c i a l statements. But, as M u e l l e r observes, a b s o l u t e d i s c l o s u r e d u t i e s e x i s t o n l y f o r f i n a n c i a l statements. While annual bu s i n e s s r e p o r t s s i g n i f i c a n t l y e l a b o r a t e on these statements, they need not be made p u b l i c beyond a v a i l a b i l i t y f o r i n s p e c t i o n by s t o c k h o l d e r s T h e r e f o r e , the communication of " d i s c l o s e d " f i n a n c i a l data i s l i m i t e d , because t h e l a n n u a l b u s i n e s s * r e p o r t does not n e c e s s a r i l y become p u b l i c i n f o r m a -t i o n . See Gerhard G. M u e l l e r , Accounting P r a c t i c e s In  West Germany, I n t e r n a t i o n a l B u s i n e s s S e r i e s , Number 4, F a c u l t y Research and P u b l i c a t i o n s , C o l l e g e of Business A d m i n i s t r a t i o n , U n i v e r s i t y of Washington, S e a t t l e , United S t a t e s , 1 9 6 4 , p. 3 2 . 40 r e p o r t s i s r e s t r i c t e d t o o n l y f o u r c i t i e s , v i z . , Washington, D.C., New Y o r k , C h i c a g o and San F r a n c i s c o ( 5 7 ) . T h i s means t h a t i t i s not always p o s s i b l e nor c o n v e n i e n t f o r , say, an a n a l y s t or a p r o s p e c t i v e i n v e s t o r , t o v i s i t any one of t h e s e l o c a t i o n s . Thus, the f o l l o w i n g comment by Savage i s p e r t i n e n t ( 5 8 ) : A n o t h e r p i e c e o f i n f o r m a t i o n not u s u a l l y a v a i l a b l e t o us, u n l e s s we c o n s u l t the IO-K r e p o r t s t o the S.B.C., i s the amount of r e n t a l s p a i d . T h i s may not be s i g n i f i c a n t i n many c a s e s , b u t , where i t i s , i t s h o u l d not be n e c e s s a r y f o r us t o go t o the expense and i n c o n v e n i e n c e of s e c u r i n g the i n -f o r m a t i o n from r e p o r t s made t o g o v e r n -ment b o d i e s . As a n o t h e r i l l u s t r a t i o n , i n I n d i a , i t i s r e p o r -t e d t h a t banks a p p o i n t t h e i r own v a l u e r s to v a l u e not o n l y f i x e d a s s e t s but even i n v e n t o r y ( 5 9 ) . J a g g i t h e r e -f o r e argues t h a t e x p e n d i t u r e on e x t r a v a l u a t i o n p r o c e d u r e s by banks c o u l d be a v o i d e d under c e r t a i n c i r c u m s t a n c e s i f the d i s c l o s u r e i n t h e f i n a n c i a l s t a t e m e n t s were adequate and r e l i a b l e ( 6 0 ) . C l e a r l y t h e n , i f a n n u a l r e p o r t s t o s t o c k h o l d e r s , e t c . , have the same e x t e n t of d i s c l o s u r e o f i n f o r m a t i o n as i n the r e p o r t s t o the S.E.C., the need t o c o n s u l t k I t i s o b s e r v e d by Hobgood, however, t h a t : " I n O c t o b e r 1970, t h e S.E.C. r u l e d t h a t compa-41 the l a t t e r would be o b v i a t e d , and thereby much unnecessary expense and i n c o n v e n i e n c e would be s a v e d . 1 CORPORATE DISCLOSURE LEGISLATION Although the t r e n d i n r e c e n t years has been towards b e t t e r and g r e a t e r d i s c l o s u r e by c o r p o r a t i o n s , i t i s not s u f f i c i e n t to depend e n t i r e l y on v o l u n t a r y d i s c l o -sure to ensure f u r t h e r p r o g r e s s i n t h i s d i r e c t i o n . Nor i s i t i n the best p u b l i c i n t e r e s t to l e a v e the d e c i s i o n on d i s c l o s u r e c o m p l e t e l y w i t h the c o r p o r a t i o n s s i n c e the f i n a n c i a l r e p o r t i s so important, as i s e v i d e n t by "the i n c r e a s e d number of economic s e c t o r s c i t i n g t h e i r depen-dence thereon." (61) Thus Wilcox warns t h a t (62): n i e s must now break down t h e i r s a l e s and e a r n i n g s by • l i n e s of b u s i n e s s ' and r e p o r t these on 1970's I0-K r e p o r t s . While the S.E.C. does not r e q u i r e t h a t these same d i s c l o s u r e s be made i n the company's r e p o r t to s t o c k h o l d e r s , i t i s apparent from a review of 1970 r e p o r t s t h a t many companies have a l r e a d y opted to i n -c l u d e s i m i l a r d i s c l o s u r e s i n s t o c k h o l d e r r e p o r t s . " See George Hobgood, "Segmental D i s c l o s u r e In 1970 Annual R e p o r t s , " F i n a n c i a l E x e c u t i v e , August, 1971, pp. 18-22. 1 T here i s a l s o an a d d i t i o n a l argument advocat-i n g harmony i n r e p o r t i n g to both the s t o c k h o l d e r s , e t c . , and the S.E.C. I t i s c l a i m e d t h a t , i f the IO-K r e p o r t s are o n l y a v a i l a b l e i n the f o u r c i t i e s mentioned, a n a l y s t s i n these c i t i e s w i l l c e r t a i n l y be given an undue advantage over those elsewhere i n the U n i t e d S t a t e s . That means a k i n d of " i n s i d e r group" i s c r e a t e d . The adverse e f f e c t s of i n s i d e r t r a d i n g on market p r i c e s of s e c u r i t i e s have a l -ready been p o i n t e d out (See supra, pp. 34-35). 42 i t i s n o t a l w a y s s a f e t o l e a v e b u s i n e s s t o i t s own d e v i c e s ; e x p e r i e n c e has shown t h a t i t s f r e e d o m w i l l some-t i m e s be a b u s e d T h e s e a b u s e s have n o t c h a r a c t e r i s e d a l l b u s i n e s s a t : a l l t i m e s , b u t t h e y have o c c u r r e d w i t h s u f f i c i e n t f r e q u e n c y t o j u s t i f y t h e i m p o s i t i o n o f c o n t r o l s . R e g u l a t i o n ; i s c l e a r l y r e q u i r e d , n o t o n l y t o p r o t e c t t h e i n v e s t o r , t h e w o r k e r , t h e c u s t o m e r , and t h e community a t l a r g e a g a i n s t t h e u n s c r u p u l o u s b u s i n e s s m a n , but a l s o t o p r o t e c t t h e h o n e s t b u s i n e s s m a n a g a i n s t h i s d i s h o n e s t c o m p e t i t o r . The i m p o r t a n c e o f t h e p u b l i c i n t e r e s t i n c o r -p o r a t e d i s c l o s u r e i s e v i d e n t f r o m t h e f o l l o w i n g s t a t e -ments o f t h e U n i t e d S t a t e s S e c u r i t i e s and E x c h a n g e Com-m i s s i o n (65) : (a) I t i s o u r jud g e m e n t , and we so f i n d , t h a t d i s c l o s u r e o f t h e i n f o r m a t i o n r e s p e c t i n g t h e r e g i s -t r a n t ' s g r o s s s a l e s and c o s t o f goods s o l d i s i n t h e p u b l i c • .' •. i n t e r e s t , and t h a t s u c h i n f o r m a t i o n s h o u l d be made a v a i l a b l e t o t h e p u b l i c . (b) I t i s c l e a r t h a t t h e ( S e c u -r i t i e s E x c h a n g e ) A c t c o n t e m p l a t e s p u b l i c i t y o f c o r p o r a t e f i n a n c i a l r e p o r t s t o i n s u r e t h e m a i n t e n a n c e o f f a i r d e a l i n g s i n t h e p u r c h a s e m F o r f u r t h e r d e t a i l s , s e e f o r ex a m p l e , t h e s u r v e y s o f a n n u a l r e p o r t s by G e o r g e Hobgood i n t h e F i n a n -c i a l E x e c u t i v e : " V o l u n t a r y D i s c l o s u r e I n 1957 AnnuaT R e p o r t s , " J u n e , 1968, pp. 81-84; " V o l u n t a r y D i s c l o s u r e I n 1968 A n n u a l R e p o r t s , " A u g u s t , 1969, pp. 64-69; " I n c r e a s e d D i s c l o s u r e I n 1969 C o r p o r a t e A n n u a l R e p o r t s , " A u g u s t , 1970, pp. 24-33; "Segmented D i s c l o s u r e I n 1970 A n n u a l R e p o r t s , " A u g u s t , 1971, pp. 18-22. 43 and s a l e o f s e c u r i t i e s n o t o n l y f o r t h e b e n e f i t o f t h e i n v e s t i n g p u b l i c , b u t as w e l l f o r t h e p r o -t e c t i o n o f banks i n w h i c h l o a n s a r e c o l l a t e r a l l e d by s u c h s e c u r i -t i e s . I f a d e q u a t e d i s c l o s u r e o f c o r p o r a t e f i n a n -c i a l r e p o r t s i s a m a t t e r o f p u b l i c i n t e r e s t , t h e n r e g u l a -t i o n on c o r p o r a t e r e p o r t i n g a p p e a r s n e c e s s a r y . T h u s Cowan e x p l a i n s t h e d e s i r a b i l i t y o f c o r p o r a t e d i s c l o s u r e l e g i s l a t i o n as f o l l o w s ( 6 4 ) : I f i n a s o c i e t y t h e f i n a n c i n g o f b u s i n e s s e n t e r p r i s e , t h e i n v e s t -ment c h o i c e s o f t h e c i t i z e n s , and t h e d i r e c t i o n o f t h e e c o n o m i c r e s o u r c e s o f t h e community, a r e i n f l u e n c e d t o an i m p o r t a n t e x t e n t by t h e e x t e r n a l r e p o r t s o f compa-n i e s , t h e n t h e S t a t e has t o s e e t h a t a d e q u a t e s t a n d a r d s o f r e p o r t -i n g a r e a d h e r e d t o . Bu t i t i s i m p o r t a n t t o n o t e t h a t any s u c h l e g i s l a t i o n s h o u l d p r o v i d e b r o a d g u i d e l i n e s as o p p o s e d t o d e t a i l e d r e g u l a t i o n s . The d i s a d v a n t a g e o f t o o d e t a i l -ed and t o o r i g i d l e g i s l a t i o n i s c l e a r l y p o i n t e d o u t by S c o t t (6S)>. The r e s u l t o f d e t a i l e d and r i g i d l e g i s l a t i o n w o u l d a l m o s t c e r t a i n l y be r i g i d a c c o u n t i n g and r e p o r t i n g p r a c -t i c e s , e ven when b u s i n e s s p r a c t i c e s c h a n g e t h r o u g h o u t t h e b u s i n e s s communi-t y . N o t o n l y w o u l d a c c o u n t i n g f a i l t o c h ange as i t s e n v i r o n m e n t c h a n g e d , but a l s o t h e v e r y r i g i d i t y o f t h i s a c c o u n t i n g w o u l d t e n d t o impede t h e 44 a d o p t i o n o f more modern b u s i n e s s p r a c -t i c e s and management t e c h n i q u e s e s s e n -t i a l t o e c o n o m i c d e v e l o p m e n t . I t i s t h u s n o t s u r p r i s i n g t h a t l e g i s l a t i v e r e q u i r e m e n t s i n t h e U n i t e d S t a t e s r e l a t i n g t o c o r p o r a t e d i s c l o s u r e a r e t h e minimum 1 1 n e c e s s a r y f o r t h e p r o t e c t i o n o f t h e p u b l i c i n t e r e s t . I n f a c t , " t h e S e c u r i t i e s and E x c h a n g e C o m m i s s i o n has been r e l u c t a n t t o e x e r c i s e t o t h e f u l l e s t i t s l e g a l power and has a l w a y s m a i n t a i n e d a p o l i c y o f maximum c o p p e r a t i o n w i t h t h e A I C P A ° on m a t t e r s r e l a t i n g t o f i n a n c i a l r e p o r t i n g . " (66) S c o t t , however, c i t e s an i m p o r t a n t e x c e p t i o n t o f l e x i b i l i t y i n r e p o r t i n g l e g i s l a t i o n and t h i s a p p l i e s t o d i s c l o s u r e o f c r i t i c a l f i n a n c i a l e v e n t s . Q u o t i n g him f u r t h e r (67;): n H o l z e r , however, w i t h r e f e r e n c e t o c o r p o r a t e r e p o r t i n g i n West Germany, n o t e s t h e d a n g e r o f c o m p a n i e s u s i n g t h e minimum s t a n d a r d o f d i s c l o s u r e as p r o v i d e d by l a w as t h e a c c e p t e d s t a n d a r d : "The law was i n t e n d e d t o e s t a b l i s h minimum s t a n d a r d s o f d i s c l o s u r e ; however, t h e r e a r e o n l y a v e r y few i n s t a n c e s i n w h i c h c o r p o r a t i o n s have gone beyond t h e minimum r e q u i r e m e n t s and d i s c l o s e d a d d i t i o n a l i n f o r m a -t i o n . I t a p p e a r s t h a t t h e l e g a l r e q u i r e m e n t s , i n s t e a d o f i n d i c a t i n g a minimum s t a n d a r d o f d i s c l o s u r e , have come t o be a c c e p t e d as t h e s t a n d a r d . " ( u n d e r s c o r i n g o r i g i n a l ) . See I I . P . H o l z e r , " C o r p o r a t e F i n a n c i a l R e p o r t i n g I n West Germany," A c c o u n t i n g R e v i e w , J u l y , 1959, p. 402. o T h i s r e f e r s t o t h e A m e r i c a n I n s t i t u t e o f C e r t i -f i e d P u b l i c A c c o u n t a n t s . The o t h e r i n f l u e n t i a l a c c o u n t i n g body i n t h e U n i t e d S t a t e s i s t h e A m e r i c a n A c c o u n t i n g A s s o -c i a t i o n . 45 F i r m s i n some d e v e l o p i n g n a t i o n s a r e s e c r e t i v e a b o u t some a s p e c t s o f t h e i r o p e r a t i o n s , u s u a l l y f e a r i n g t h a t t h e i n f o r m a t i o n w i l l be u s e d t o t h e i r d e t r i -ment by c o m p e t i t i o n o r g o v e r n m e n t . How-e v e r , c e r t a i n i n f o r m a t i o n s u c h as t h a t r e l a t e d t o i n v e s t m e n t s i n o t h e r f i r m s , p e n d i n g l a w s u i t s , management emoluments, and s u b s i d i a r y e a r n i n g s , i s n e c e s s a r y f o r i n v e s t o r s t o make r a t i o n a l d e c i s i o n s . L e g i s l a t i o n s h o u l d r e q u i r e d e t a i l e d d i s -c l o s u r e o f t h e s e k i n d s o f i n f o r m a t i o n . N e e d l e s s t o s a y , c o r p o r a t i o n s i n t h e a d v a n c e d c o u n t r i e s a r e s u b j e c t t o t h e same k i n d o f d i s c l o s u r e r e q u i r e m e n t s f o r t h e s e t y p e s o f i n f o r m a t i o n . I n C a n a d a , f i n a n c i a l r e p o r t i n g l e g i s l a t i o n i s c l e a r l y s t i p u l a t e d i n t h e C a n a d i a n C o r p o r a t i o n s A c t , 1968. T h u s , u n d e r S e c t i o n 116 o f t h e A c t , t h e f o l l o w i n g d i s c l o s u r e r e q u i r e m e n t s a r e s p e c i f i e d ( 6 8 ) : (a) a f i n a n c i a l s t a t e m e n t made up o f ( i ) a s t a t e m e n t o f p r o f i t and l o s s ; ( i i ) a s t a t e m e n t o f s u r p l u s ; ( i i i ) a b a l a n c e s h e e t ; (b) a r e p o r t o f t h e a u d i t o r t o t h e s h a r e h o l d e r s ; ( c ) f u r t h e r i n f o r m a t i o n r e s p e c t i n g t h e f i n a n c i a l p o s i t i o n o f t h e company as t h e c h a r t e r o r b y - l a w o f t h e company r e q u i r e s . D e t a i l s o f t h e i n f o r m a t i o n t o be d i s c l o s e d i n t h e v a r i o u s f i n a n c i a l s t a t e m e n t s a r e a l s o c l e a r l y s p e l t o u t i n S e c t i o n s 117, 118 and 119 o f t h e same A c t ( 6 9 ) . In t h e U n i t e d S t a t e s , e x c e p t i n r e g u l a t e d i n d u s -46 t r i e s , f e d e r a l l e g i s l a t i o n r e l a t i n g d i r e c t l y t o company a c c o u n t i n g was a l m o s t n o n - e x i s t e n t u n t i l t h e f i n a n c i a l c r i s i s i n t h e 1930s f o l l o w i n g t h e s t o c k m a r k e t c r a s h ( 7 0 ) : The s t o c k m a r k e t c r a s h o f 1929 s i g n a l i z e d t h e g r e a t e s t w o r l d - w i d e e c o n o m i c slump o f t h a t t i m e I t d r a m a t i z e d f r a g r a n t a b u s e s and e x c e s s e s o f an u n d i s c i p l i n e d s t o c k m a r k e t , and t h e p u b l i c was v i c t i m i z e d t h r o u g h i g n o -r a n c e . Among t h o s e s p e c u l a t i v e a b u s e s were s p e c u l a t i o n on t h i n 10 p e r c e n t m a r g i n s , " b u c k e t s h o p " o p e r a t i o n s , s t o c k m a r k e t p o o l s , undue a d v a n t a g e s f r o m " i n s i d e r ' s i n f o r m a t i o n " , and b e a r r a i d s w h i c h c h a r a c t e r i z e d t h e p r e d a t o r y s p e c u l a t o r . S u c h p r a c t i c e s were un-e t h i c a l , i l l i c i t and n o t i n t h e p u b l i c i n t e r e s t as we t h i n k t o d a y ( 7 1 ) . In o r d e r t o p r o t e c t i n v e s t o r i n t e r e s t s a g a i n s t any f r a u d u l e n t p r a c t i c e s by c o r p o r a t i o n s , as w e l l as t h e economy f r o m u n s t a b l e i n f l u e n c e s a r i s i n g f r o m i m p r o p e r and i n a d e q u a t e c o r p o r a t e r e p o r t i n g , so t h e S e c u r i t i e s A c t o f 1933, and t h e S e c u r i t i e s and E x c h a n g e A c t o f 1934 came i n t o b e i n g . A s p e c t s o f t h e s e A c t s w h i c h r e l a t e t o d i s c l o s u r e o f i n f o r m a t i o n a r e R e g u l a t i o n S-X ( u n d e r t h e 1933 A c t ) ( 7 2 ) , R e g u l a t i o n I3A R e p o r t s o f I s s u e r s o f L i s t e d S e c u r i t i e s , R e g u l a t i o n 14, S c h e d u l e I4A I n f o r -m a t i o n R e q u i r e d i n P r o x y S t a t e m e n t , and S c h e d u l e I4B I n f o r m a t i o n t o be I n c l u d e d i n S t a t e m e n t s F i l e d by o r on b e h a l f o f a P a r t i c i p a n t ( o t h e r t h a n t h e i s s u e r ) i n a P r o x y S t a t e m e n t , a l l o f w h i c h a r e i n c o r p o r a t e d i n t h e 1934 A c t ( 7 3 ) . 4 7 An i m p o r t a n t r e s u l t o f t h e 1 9 3 4 A c t i s t h e e s t a b l i s h m e n t o f t h e S e c u r i t i e s and E x c h a n g e C o m m i s s i o n ( S . E . C . ) as a p e r m a nent g o v e r n m e n t a g e n c y w h i c h i s r e s p o n -s i b l e f o r i m p l e m e n t i n g t h e two A c t s . I n t h i s r e g a r d , t h e S.B.C. has c o n t r i b u t e d s i g n i f i c a n t l y t o t h e i m p r o v e m e n t i n c o r p o r a t e d i s c l o s u r e by A m e r i c a n c o m p a n i e s . T h u s , " t h e S.E.C. r e q u i r e m e n t s ( h a v e ) f o r c e d U n i t e d S t a t e s c o m p a n i e s t o r e v e a l t h e i r f i n a n c i a l p o s i t i o n s i n f a r more d e t a i l and w i t h g r e a t e r c o m p a r a b i l i t y t h a n was p r e v i o u s l y t h e c u s t o m . " (74,) I n B r i t a i n , l e g i s l a t i o n on c o r p o r a t e d i s c l o s u r e i s e m bodied i n t h e C o m p a n i e s A c t , 1 9 6 7 . T h i s most r e c e n t A c t has s t i p u l a t e d more s t r i n g e n t d i s c l o s u r e r e q u i r e m e n t s , as f o r e x ample, B r i t i s h c o m p a n i e s must now r e p o r t c o n s o l i d a t e d s a l e s and e a r n i n g s , b r o k e n down by p r o d u c t g r o u p s . T h e y must d i s -c l o s e t h e v a l u e o f e x p o r t s , " d i r e c t o r s ' e m oluments," and t h e i r s h a r e h o l d i n g s and i n s i d e d e a l i n g s , as w e l l as sums c o n t r i -b u t e d t o c h a r i t i e s and p o l i t i c a l p a r t i e s . P r i v a t e f i r m s a r e now s u b j e c t t o d i s c l o -s u r e r e q u i r e m e n t s f o r t h e f i r s t t i m e . A l l e n t e r p r i s e s must r e v e a l h o l d i n g s o f 10 p e r c e n t o r more i n o t h e r c o m p a n i e s ( 7 5 ) . P F o r an e x p a n d e d d i s c u s s i o n o f t h e A c t , s e e : J o h n B. I n g l i s , "The B r i t i s h C o m p a n i e s A c t Of 1 9 6 7 , " J o u r n a l o f A c c o u n t a n c y , J a n u a r y , 1 9 6 8 , pp. 42-45; and J . F . F l o w e r , " A c c o u n t i n g I n B r i t a i n And T h e New C o m p a n i e s A c t , " C a n a d i a n C h a r t e r e d A c c o u n t a n t , F e b r u a r y , 1 9 6 8 , pp. I I 3 - I I 5 . 48 I t i s i n t e r e s t i n g t o n o t e , however, t h a t t h e e a r l y l e g i s l a t i o n on d i s c l o s u r e a p p e a r s t o have been m o t i v a t e d by v e r y d i f f e r e n t r e a s o n s . As i n d i c a t e d e a r l i e r , t h e A m e r i c a n A c t s o f 1933 and 1934 a r e i n t e n d e d t o p r o t e c t i n v e s t o r s and o t h e r s a g a i n s t company fraud**, t o p r e v e n t m a n i p u l a t i o n and r i g g i n g o f t h e s t o c k m a r k e t , and t o e l i m i n a t e t h e e v i l s o f e x c e s s i v e s p e c u l a t i o n . The same r e a s o n s seem t o u n d e r l i e t h e e a r l y B r i t i s h C o m p a n i e s A c t , as t h e f o l l o w i n g c i t a t i o n . f r o m De B e d t s s u g g e s t s ( 7 6 ) : W i t h t h e d i s p e r s i o n o f o w n e r s h i p i n t o numerous ha n d s , t h e j o i n t - s t o c k company r e v e a l e d i t s e l f as n o t o n l y a v a l u a b l e i n s t r u m e n t f o r f i n a n c i n g new i n d u s t r i e s and c o l o n i z a t i o n but as an i n g e n i o u s l y i r r e s p o n s i b l e d e v i c e f o r d e f r a u d i n g t h a t p o r t i o n o f t h e p u b l i c e a g e r t o i n v e s t i t s s u r p l u s w e a l t h The " B u b b l e A c t " o f 1720, p a s s e d by a P a r l i a m e n t e x c e e d i n g l y aware o f t h e c o n t e m p o r a r y wave o f s u i c i d e s , r u i n a -t i o n , and i m p r i s o n m e n t o f h i g h o f f i c i a l s , c a u s e d a s e t b a c k i n c o r p o r a t e d e v e l o p -ment overcome o n l y by t h e i n d u s t r i a l g r o w t h o f t h e f o l l o w i n g c e n t u r y . A d d i -t i o n a l p r o t e c t i o n f o r t h e i n v e s t o r s t h r o u g h t h e p r i n c i p l e o f d i s c l o s u r e and t h e i m p o s i t i o n o f p e n a l t i e s a g a i n s t v i o l a t o r s was i n c l u d e d i n t h e C o m p a n i e s A c t o f 1844. V a r i o u s amendments t o t h e C o m p a n i e s A c t , w h i c h became t h e E n g l i s h c o r p o r a t i o n c o d e as w e l l , c o n t i n u a l l y e x p a n d e d t h e p r o s p e c t u s r e q u i r e m e n t s and l i a b i l i t y p r o v i s i o n s i n t o t h e t w e n t i e n t h -c e n t u r y v e r s i o n o f t h e A c t . q S e e , f o r e x a m p l e , t h e U l t r a m a r e s c a s e and t h e McKesson & R o b b i n s c a s e , i n J o hn H. M y e r s , A u d i t i n g C a s e s , ( N o r t h w e s t e r n U n i v e r s i t y P r e s s : 1 9 6 4 ) , pp. 25-42. 49 I n c o n t r a s t , t h e p r e s e n t f o c u s o f i n t e r e s t i n d i s c l o s u r e i s on b e t t e r i n v e s t m e n t d e c i s i o n - m a k i n g . Hence, s t r i c t e r d i s c l o s u r e r u l e s , a s i n t h e r e c e n t B r i t i s h Com-p a n i e s A c t o f 1967, a r e d e s i g n e d t o c o m p e l c o m p a n i e s t o d i s c l o s e more f u l l y , so t h a t i n v e s t o r s may be b e t t e r i n -f o r m e d as t o what r e t u r n d i f f e r e n t i n d u s t r i e s and d i f f e -r e n t f i r m s c a n e a r n on t h e i r c a p i t a l . I n v e s t o r s w i l l t h e n have a b e t t e r b a s i s on w h i c h t o make t h e i r d e c i s i o n s . An e d i t o r i a l comment i n L o n d o n ' s F i n a n c i a l T i m e s t h u s n o t e s t h a t " t h e e m p h a s i s o f company l e g i s l a t i o n i s c h a n g i n g and has now swung d e c i s i v e l y away f r o m t h e p r e v e n -t i o n o f f r a u d t o t h e d i s c o u r a g e m e n t o f i n e f f i c i e n c y . " (77) C l e a r l y , a v o i d a n c e o f i n e f f i c i e n c y i s d e p e n d e n t upon t h e making o f more i n f o r m e d i n v e s t m e n t d e c i s i o n s b a s e d on f u l l c o r p o r a t e d i s c l o s u r e . SUMMARY I n t h i s c h a p t e r , an a t t e m p t i s made t o e s t a b l i s h t h e r a t i o n a l e o f a d e q u a t e c o r p o r a t e d i s c l o s u r e o f i n f o r m a -t i o n . I n t h e l i g h t o f t h i s d i s c u s s i o n , i t i s c l e a r t h a t t h e n e e d s o f t h e d i f f e r e n t p a r t i e s a t i n t e r e s t may be a p p r o -p r i a t e l y s e r v e d i f a d e q u a t e i n f o r m a t i o n a b o u t c o r p o r a t e a f f a i r s i s made a v a i l a b l e t o them. I n o t h e r w o rds, t h e r e a r e l i k e l y b e n e f i t s t o be d e r i v e d f r o m f u l l d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n : 50 (a) F u l l d i s c l o s u r e , by p r o v i d i n g a b a s i s f o r ma k i n g i n f o r m e d i n v e s t m e n t d e c i s i o n s , e n a b l e s i n v e s t o r s t o d i r e c t t h e i r i n v e s t m e n t s t o where t h e y may e x p e c t t h e h i g h e s t r a t e o f r e t u r n . By i m p l i c a t i o n , t h i s l e a d s t o a more e f f i c i e n t a l l o c a t i o n o f t h e n a t i o n ' s r e s o u r c e s . (b) F u l l d i s c l o s u r e , by c r e a t i n g i n v e s t o r c o n -f i d e n c e , s t i m u l a t e s t h e d e v e l o p m e n t o f t h e c a p i t a l m a r k e t . The i m p o r t a n c e o f t h e c a p i t a l m a r k e t i n m e e t i n g t h e c a p i -t a l r e q u i r e m e n t s o f c o r p o r a t i o n s i n a p r i v a t e - e n t e r p r i s e economy n e e d s no e m p h a s i s . ( c ) F u l l d i s c l o s u r e e n a b l e s c o r p o r a t i o n s t o r a i s e c a p i t a l a t a more r e a s o n a b l e c o s t . (d) F u l l and t i m e l y d i s c l o s u r e , by e l i m i n a t i n g " i n s i d e r t r a d i n g " and e x c e s s i v e s p e c u l a t i v e d e a l i n g s , c o n -t r i b u t e s t o w a r d s g r e a t e r s t a b i l i t y i n t h e s e c u r i t i e s m a r k e t s (e ) F u l l d i s c l o s u r e i s d e s i r a b l e f o r management's a c c o u n t i n g f o r s t e w a r d s h i p . ( f ) F u l l d i s c l o s u r e i n a n n u a l ' r e p o r t s o b v i a t e s t h e i n c o n v e n i e n c e , e x p e n s e , and d i f f i c u l t y o f o b t a i n i n g t h e i n f o r m a t i o n i n o t h e r ways. (g) F u l l d i s c l o s u r e i s n e c e s s a r y t o s a f e g u a r d t h e p u b l i c i n t e r e s t a g a i n s t any f r a u d u l e n t p r a c t i c e s by c o r p o r a t i o n s , h ence t h e o b j e c t i v e o f c o r p o r a t e d i s c l o s u r e l e g i s l a t i o n . 51 F o o t n o t e s I C . H . G r i f f i n and T . H - W i l l i a m s , " M e a s u r i n g A d e q u a t e D i s c l o s u r e , " J o u r n a l o f A c c o u n t a n c y , A p r i l , I 9 6 0 , p. 44. 2 M i c h a e l N. C h e t k o v i c h , " S t a n d a r d s o f D i s c l o s u r e And T h e i r D e v e l o p m e n t , " J o u r n a l o f A c c o u n t a n c y , December, 1955, p. 48. 3 S t e p h e n G i l m a n , A c c o u n t i n g C o n c e p t Of P r o f i t , (New Y o r k : R o n a l d P r e s s Company, 1 9 3 9 ) , p. 242. 4 C . H . G r i f f i n and T . H . W i l l i a m s , o p . c i t . , p. 44. 5 W . B . F l o w e r s , "Some C r i t e r i a F o r P o s t - S t a t e m e n t D i s c l o s u r e , " J o u r n a l o f A c c o u n t a n c y , J a n u a r y , 1961, p. 50. 6 W i l l i a m W. W e r n t z , "Dilemmas I n T o d a y ' s R e p o r t -i n g , " J o u r n a l o f A c c o u n t a n c y , November, 1955, p. 45. 7 J a c o b G. B i r n b e r g and N i c h o l a s Dupoch, "A C o n -c e p t u a l A p p r o a c h To The Framework Of D i s c l o s u r e , " J o u r n a l  o f A c c o u n t a n c y , F e b r u a r y , 1963, p. 56. 8 E l d o n S. H e n d r i k s e n , A c c o u n t i n g T h e o r y , (Home-wood, I l l i n o i s : R i c h a r d D. I r w i n , I n c . , R e v i s e d E d i t i o n , 1 9 6 8 ) , C h a p t e r 19, p. 562. 9 D a l b e r t E . W i l l i a m s o n , C o n c e p t Of D i s c l o s u r e On  F i n a n c i a l S t a t e m e n t s ( U n p u b l i s h e d D o c t o r a l D i s s e r t a t i o n , S t a n d f o r d U n i v e r s i t y , I 9 6 0 ) , p. 26. 10 C o m m i t t e e on C o n c e p t s and S t a n d a r d s , A m e r i c a n A c c o u n t i n g A s s o c i a t i o n , " S t a n d a r d s Of D i s c l o s u r e F o r P u b l i s h e d F i n a n c i a l R e p o r t s , " The A c c o u n t i n g R e v i e w , J u l y , 1955, pp. 4 0 0 - 0 1 . 52 I I R o b e r t K. Mautz, F i n a n c i a l R e p o r t i n g By  D i v e r s i f i e d C o m p a n i e s , F i n a n c i a l E x e c u t i v e s R e s e a r c h F o u n d a t i o n , New Y o r k , 1968, p. 104. 12 I b i d . 13 I b i d . , p. 106. 14 I b i d . , p. 107. 15 I b i d . , p. 109. 16 See, f o r e x a m p l e , J a c o b G. B i r n b e r g and N i c h o -l a s Dupoch, op. c i t . , pp. 56-63. See a l s o H.W.Cooper, N.Dupoch and T . F . K e l l e r , " B u d g e t a r y D i s c l o s u r e And O t h e r S u g g e s t i o n s F o r I m p r o v i n g A c c o u n t i n g R e p o r t s , " A c c o u n t i n g  R e v i e w , O c t o b e r , 1968, pp. 640-647. 17 J a c o b G. B i r n b e r g and N i c h o l a s Dupoch, op. c i t . , p. 58 . 18 B a r u c h L e v and Aba S c h w a r t z , "On The Use Of The E c o n o m i c C o n c e p t Of Human C a p i t a l In F i n a n c i a l S t a t e m e n t s , " A c c o u n t i n g R e v i e w , J a n u a r y , 1971, pp. I 0 3 - I I I . 19 I b i d . 20 M a r t i n M e l l m a n , " P r o f i t a b i l i t y D i s c l o s u r e By C o n g l o m e r a t e C o m p a n i e s , " New Y o r k C e r t i f i e d P u b l i c A c c o u n -t a n t , A u g u s t , 1967, p. 595. 21 H e a r i n g s b e f o r e t h e S u b c o m m i t t e e on A n t i t r u s t  and M o n o p o l y , C o m m i t t e e on t h e J u d i c i a r y , U n i t e d S t a t e s  S e n a t e , B i g h t y - N i n e t h C o n g r e s s , F i r s t S e s s i o n , p. 1071, as q u o t e d by Thomas E . L y n c h , " D i v e r s i f i e d R e p o r t i n g , " F i n a n c i a l A n a l y s t s J o u r n a l , November-December, 1968, p. 68. 22 G e o r g e M. S c o t t , A c c o u n t i n g And D e v e l o p i n g  N a t i o n s , G r a d u a t e S c h o o l o f B u s i n e s s A d m i n i s t r a t i o n , U n i -v e r s i t y o f W a s h i n g t o n , S e a t t l e , 1970, p. 50. 53 23 A d o l f J.H. E n t h o v e n , " E c o n o m i c D e v e l o p m e n t And A c c o u n t a n c y , " J o u r n a l o f A c c o u n t a n c y , A u g u s t , 1965, p. 33. 24 D o n a l d M. F e u e r s t e i n , "SEC R e s t r i c t i o n s On The Use Of I n s i d e I n f o r m a t i o n , " F i n a n c i a l E x e c u t i v e , December, 1969, p. 18. 25 M a n u e l F. C o h e n , "Some P r o b l e m s Of D i s c l o s u r e , " J o u r n a l o f A c c o u n t a n c y , May, 1968, p. 63. 26 E c o n o m i s t , "Company A c c o u n t a n t s : How Much More D i s c l o s u r e ? " E c o n o m i s t , V o l . 209, O c t o b e r 5, 1963, p. 77. 27 I b i d . 28 I b i d . 29 G e o r g e M. S c o t t , op. c i t . , p. 40. 30 G e r h a r d G. M u e l l e r , I n t e r n a t i o n a l A c c o u n t i n g , (New Y o r k : M a c M i l l a n Company, 1 9 6 7 ) , p. 20. 31 G e o r g e M. S c o t t , op. c i t . , p.- 40. 32 R o b e r t E . S e l l e r , " A c c o u n t i n g , I n f o r m a t i o n S y s t e m s , And U n d e r d e v e l o p e d N a t i o n s , " A c c o u n t i n g R e v i e w , O c t o b e r , 1966, p. 653. 33 James J . Mahon, " A c c o u n t i n g P r i n c i p l e s D e b a t e And I n v e s t o r C o n f i d e n c e , " F i n a n c i a l E x e c u t i v e , 1966, p. 32. 34 R o b e r t W. Haack, " V i e w p o i n t s I n C o r p o r a t e D i s c l o s u r e , " F i n a n c i a l E x e c u t i v e , F e b r u a r y , 1969, p. 19. 35 Herman W. B e v i s , C o r p o r a t e F i n a n c i a l R e p o r t i n g  In A C o m p e t i t i v e Economy, (New Y o r k : M a c M i l l a n Company, 1 9 6 5 ) , p. 19. 54 36 John L. Carey (ed.), The Accounting P r o f e s -sio n Where Is I t Headed?, (New York: AICPA, 1962), p. 53, as quoted by Abraham J . B r i l o f f , The E f f e c t i v e n e s s  Of Accounting Communication, (New York: F r e d e r i c k A. Praeger, 1967), pp. 5-6. 37 George M. S c o t t , op. c i t . , p. 9. 38 Surendra S. S i n g h v i , " C h a r a c t e r i s t i c s And I m p l i c a t i o n s Of Inadequate D i s c l o s u r e : A Case Study Of I n d i a , " The I n t e r n a t i o n a l J o u r n a l of Accounting, S p r i n g , 1968, pp. 40-41. 39 Edward L. Summers, "Observation of E f f e c t s Of Using A l t e r n a t i v e R e p o r t i n g P r a c t i c e s , " Accounting Review, A p r i l , 1968, pp. 257-258. 40 George J . S t i g l e r , "The Economics Of Informa-t i o n , " The J o u r n a l of P o l i t i c a l Economy, LXIX, June, 1961, p. 214. 41 Surendra S. S i n g h v i and Harsha B. D e s a i , "An E m p i r i c a l A n a l y s i s Of The Q u a l i t y Of Corporate F i n a n c i a l D i s c l o s u r e , " Accounting Review, January, 1971, p. 136. 42 Irwin F r i e n d and Edward S. Herman, "The S.E.C. Through A Glass Darkly," The J o u r n a l of Business, U n i v e r s i t y of Chicago, October, 1964, p. 391, footnote 18. 43 Dudley E. Browne, " D i f f e r e n c e s Between United S t a t e s And Foreign R e p o r t i n g , " F i n a n c i a l E x e c u t i v e , January, 1963, pp. 20-23. George S. B i s s e l l , "Corporate D i s c l o s u r e And I n s i d e Information," F i n a n c i a l A n a l y s t s J o u r n a l , November-December, 1968, p. 10. 45 Marcel F. Kohler and Adolph Mataz, "Swiss F i n a n c i a l R e p o r t i n g And A u d i t i n g P r a c t i c e s , " Abacus, August, 1968, p. 13. 55 46 R a i n e r E s s l e n , " M a t e r i a l News F o r T i m e l y D i s c l o s u r e , " F i n a n c i a l E x e c u t i v e , J a n u a r y , 1969, pp. 2 5 -26 . 47 John C. B i e g l e r , "Key O b j e c t i v e s I n F i n a n c i a l R e p o r t i n g , " Management R e v i e w , A u g u s t , 1965, p. 16. 48 H a r o l d B u r s o n , " G u i d e l i n e s F o r F i n a n c i a l D i s -c l o s u r e , " F i n a n c i a l E x e c u t i v e , November, 1968, p. 22. 49 C h a r l e s T. H o r n g r e n , " D i s c l o s u r e : 1957," A c c o u n t i n g R e v i e w , O c t o b e r , 1957, p. 601. 50 D o n a l d M. F e u e r s t e i n , op. c i t . , p. 18. 51 I b i d . 52 Herman W. B e v i s , op. c i t . , p. 7. 53 A d d r e s s by M a n u e l F . Cohen b e f o r e t h e 7 9 t h  a n n u a l m e e t i n g o f t h e A m e r i c a n I n s t i t u t e o f C e r t i f i e d  P u b l i c A c c o u n t a n t s , J o u r n a l o f A c c o u n t a n c y , December, 1966, p. 59. 54 F o r a more t h o r o u g h d i s c u s s i o n o f t h e d i f f e -r e n c e s between a n n u a l r e p o r t s t o s t o c k h o l d e r s and r e p o r t s t o t h e U n i t e d S t a t e s S e c u r i t i e s and E x c h a n g e C o m m i s s i o n , s e e S u r e n d r a S. S i n g h v i , " D i s c l o s u r e To Whom? A n n u a l R e p o r t s To S t o c k h o l d e r s And To The S e c u r i t i e s And E x c h a n g e Commis-s i o n , " J o u r n a l o f B u s i n e s s , J u l y , 1968, pp. 347-351. See a l s o M a r t i n M e l l m a n , " D i f f e r e n c e s I n D i s c l o s u r e A n n u a l R e p o r t s To S t o c k h o l d e r s V e r s u s R e p o r t s To The S.E.C.," The New Y o r k C e r t i f i e d P u b l i c A c c o u n t a n t , J a n u a r y , 1965, pp. 25-30. 55 I b i d . 56 S u r e n d r a S. S i n g h v i , op. c i t . , p. 347. 56 57 P h i l i p E . A l b r e c h t , " A n a l y s t V i e w s F i n a n c i a l R e p o r t i n g P r o b l e m s , " F i n a n c i a l E x e c u t i v e , S e p t e m b e r , 1966, p. 18 . 58 E . L i n w o o d S a v a g e , J r . , " C o n c l u s i o n s R e g a r d i n g A n n u a l R e p o r t s , " A n a l y s t s J o u r n a l , F e b r u a r y , 1954, p. 54. 59 B. J a g g i , "A R e v i e w Of The A c c o u n t i n g P r o f e s s i o n I n I n d i a , " T he I n t e r n a t i o n a l J o u r n a l o f A c c o u n t i n g , F a l l , 1970, p. 4 0 . 60 I b i d . 61 C. H . G r i f f i n and T . H . W i l l i a m s , op. c i t . , p. 45. 62 C l a i r e W i l c o x , P u b l i c P o l i c i e s T oward B u s i n e s s , (Homewood, I l l i n o i s : R i c h a r d D. I r w i n , I n c . , 1966, T h i r d E d i t i o n ) , p. 8. 63 A m e r i c a n S u m a t r a T o b a c c o C o r p o r a t i o n , 7 SEC  1053 (1940) and A m e r i c a n S u m a t r a T o b a c c o C o r p o r a t i o n  v s SEC, I I P F . (2d) 119 (1940) r e s p e c t i v e l y , as q u o t e d by C i i r . G r i f f i n and T . H . W i l l i a m s , op. c i t . , p. 46. 64 T.K.Cowan, "The H a r m o n i z a t i o n Of A c c o u n t i n g P r i n c i p l e s , " The New H o r i z o n s o f A c c o u n t i n g ( P r o c e e d i n g s ) N i n t h I n t e r n a t i o n a l C o n g r e s s o f A c c o u n t a n t s ( P a r i s : 1 9 6 7 ) , p. 151, as q u o t e d by G e o r g e M . S c o t t , op. c i t . , p. 159. 65 G e o r g e M . S c o t t , op. c i t . , pp. 159-160. 66 I b i d . , p. 123. 67 I b i d . , pp. 159-160. 68 C a n a d i a n C o r p o r a t i o n s A c t , 1968 (Don M i l l s , O n t a r i o : CCH C a n a d i a n L i m i t e d , 1 9 6 8 ) , pp. 91-99. 69 L o c . c i t . 57 70 G e o r g e M. S c o t t , op. c i t . , p. 114. 71 H a r o l d M. G a r t l e y , " F u l l D i s c l o s u r e P o l i c y W i d e n s , " F i n a n c i a l E x e c u t i v e , November, 1963, p. 46. 72 U n i t e d S t a t e s S e c u r i t i e s and E x c h a n g e Commis-s i o n , R e g u l a t i o n S-X U n d e r The S e c u r i t i e s A c t Of 1955, W a s h i n g t o n , D.C.: U.S. Gove r n m e n t P r i n t i n g O f f i c e , 1 9 6 2 ) . 73 U n i t e d S t a t e s S e c u r i t i e s and E x c h a n g e Commis-s i o n , G e n e r a l R u l e s And R e g u l a t i o n s Under The S e c u r i t i e s  E x c h a n g e A c t Of 1954, ( W a s h i n g t o n , D.C.: U n i t e d S t a t e s G o v e r n m e n t P r i n t i n g O f f i c e , 1 9 6 2 ) . 74 G e o r g e M. S c o t t , op. c i t . , p. 115. 75 R o b e r t B a l l , " D e c l i n i n g Of C o n c e a l i n g The F i g u r e s , " F o r t u n e , S e p t e m b e r 15, 1967, p. 166. 76 R a l p h F . De B e d t s , The New D e a l ' s SEC, (New Y o r k : C o l u m b i a U n i v e r s i t y P r e s s , 1 9 6 4 ) , pp. 2-3. 77 As q u o t e d by R o b e r t B a l l , o p. c i t . , p. 166. CHAPTER THREE THE ACCOUNTING PROBLEM OF MATERIALITY IN DISCLOSURE C o r p o r a t e d i s c l o s u r e o f i n f o r m a t i o n r e q u i r e s t h a t t h e masses o f a c c o u n t i n g and n o n - a c c o u n t i n g d a t a must be f i r s t c l a s s i f i e d and s u m m a r i s e d i n s u c h a way t h a t t h e y w i l l be m e a n i n g f u l and u s e f u l t o t h e e x t e r n a l p a r t i e s a t i n t e r e s t . F o r one r e a s o n , e v e n i n t h e a b s e n c e o f r e l a t i v e -l y t r i v i a l i t e m s , p u b l i s h e d c o r p o r a t e r e p o r t s a r e a l r e a d y d i f f i c u l t t o comprehend and a n a l y s e . C o n s e q u e n t l y , when e v e r y s m a l l d e t a i l i s i n c l u d e d , t h i s may o n l y i n c r e a s e t h e d i f f i c u l t y o f u n d e r s t a n d i n g and a n a l y s i s . Nor do e s more i n f o r m a t i o n n e c e s s a r i l y mean g r e a t e r d i s c l o s u r e f o r , t h e i n d i s c r i m i n a t e a d d i n g o f i n f o r m a t i o n i n c o r p o r a t e r e p o r t s may c a u s e e s s e n t i a l f a c t s t o be b u r i e d among a mass o f i n -s i g n i f i c a n t d e t a i l s . I n d e c i d i n g how c o r p o r a t e d a t a may be c l a s s i f i e d and t o what e x t e n t t h e y may be a g g r e g a t e d , w h i c h a r e i m p o r -t a n t t o t h e q u e s t i o n o f a d e q u a t e d i s c l o s u r e , t h e a c c o u n t i n g c o n c e p t o f m a t e r i a l i t y may p r o v i d e a g u i d e . But t h e p r o b l e m a r i s e s r e g a r d i n g t h e i n t e r p r e t a t i o n and a p p l i c a t i o n o f t h e m a t e r i a l i t y c o n c e p t . T h a t i s , a l t h o u g h " t h e c o n c e p t o f 59 m a t e r i a l i t y i n e v i t a b l y e n t e r s i n t o t h e d e t e r m i n a t i o n o f t h e d i s c l o s u r e t o be made un d e r any g i v e n s e t o f c i r c u m -s t a n c e s , " ( I ) i t s i n t e r p r e t a t i o n and a p p l i c a t i o n , however, a r e n o t b a s e d on a common s e t o f c r i t e r i a . T h i s theme i s e n l a r g e d upon i n t h i s c h a p t e r . A l s o , an e d i t o r i a l comment r e f l e c t s c o n c e r n t h a t t h e m a t e r i a l i t y c o n c e p t i s n o t r e c e i v i n g s u f f i c i e n t a t t e n -t i o n (2 ) : U s e f u l d i s c u s s i o n s o f t h e mate-r i a l i t y p r o b l e m i n t h e l i t e r a t u r e o f a c c o u n t i n g a r e u n f o r t u n a t e l y s c a r c e . In t h i s p e r i o d o f renewed e v a l u a t i o n o f b a s i c c o n c e p t s o f a c c o u n t i n g , and i n c r e a s e d p u b l i c a t t e n t i o n f o c u s e d on f i n a n c i a l s t a t e m e n t s , m a t e r i a l i t y s h o u l d r e c e i v e m a j o r a t t e n t i o n . MEANING OF MATERIALITY C l e a r l y , i f c o n s i d e r a t i o n s o f m a t e r i a l i t y a r e f u n d a m e n t a l t o t h e p r o p e r p r e s e n t a t i o n and r e p o r t i n g o f a c c o u n t i n g d a t a , t h e meaning o f m a t e r i a l i t y must be f u l l y a Snavely observes the d i s t i n c t i o n between " m a t e r i a l i t y " and " r e l e v a n c e " . According to him, an item of in f o r m a t i o n may be r e l e v a n t to a p a r t i c u l a r d e c i s i o n but t h i s does not mean that a l l r e l e v a n t i n f o r m a t i o n need be d i s c l o s e d unless such i n f o r m a t i o n i s at the same time m a t e r i a l i n amount. For t h i s reason, Hendriksen t r e a t s m a t e r i a l i t y as a c o n s t r a i n t on relevance meaning by t h i s accounting i n f o r m a t i o n can only be re l e v a n t i f i t i s m a t e r i a l l y r e l e v a n t . In t h i s study, relevance i s used i n the Hendriksen sense. See Howard J . Snavely, Accounting Information C r i t e r i a " , Accounting Review, A p r i l , 1967; a l s o , Eldon S. Hendriksen, Accounting Theory,(Homewood, I l l i n o i s : R i chard D. I r w i n , Inc., 1969), p. 106. 60 u n d e r s t o o d by a l l t h o s e r e s p o n s i b l e f o r p r e p a r i n g f i n a n -c i a l r e p o r t s . D o h r ' s D e f i n i t i o n Of M a t e r i a l i t y : A s u r v e y o f t h e a v a i l a b l e l i t e r a t u r e a p p e a r s t o i n d i c a t e t h a t t h e c o n -c e p t o f m a t e r i a l i t y i s n o t e a s i l y s u s c e p t i b l e t o p r e c i s e d e f i n i t i o n . N e v e r t h e l e s s , t h e f o l l o w i n g d e f i n i t i o n by Dohr i s p r e s e n t e d f o r c o n s i d e r a t i o n ( 3 ) : A s t a t e m e n t , f a c t , o r i t e m i s m a t e r i a l , i f g i v e n f u l l c o n s i d e r a t i o n t o t h e s u r r o u n d i n g c i r c u m s t a n c e s , as t h e y e x i s t a t t h e t i m e , i t i s o f s u c h a n a t u r e t h a t i t s d i s c l o s u r e , o r t h e method o f t r e a t -i n g i t , w o u l d be l i k e l y t o i n f l u e n c e o r "make a d i f f e r e n c e " i n t h e j u d g e m e n t and c o n d u c t o f a r e a s o n a b l e p e r s o n . T h u s , D o h r ' s d e f i n i t i o n may p r o v i d e a c c o u n t a n t s w i t h a m e aning o f m a t e r i a l i t y i n r e l a t i o n t o c o r p o r a t e d i s c l o s u r e . A c c o r d i n g t o h i s meaning o f m a t e r i a l i t y t h e n , t h e r e seem t o be t h r e e r e l a t e d c o n s i d e r a t i o n s w h i c h must e n t e r i n t o t h e making o f a m a t e r i a l i t y d e c i s i o n : (a) The q u e s t i o n o f m a t e r i a l i t y must be d e c i d e d w i t h r e f e r e n c e t o t h e s u r r o u n d i n g c i r c u m -s t a n c e s r e l a t i n g t o an i t e m i n q u e s t i o n . F o r e x a m p l e , a $ 1 0 0 , 0 0 0 m i s - s t a t e m e n t o f i n v e n t o r y i n t h e u s u a l a n n u a l r e p o r t o f a s i z e a b l e company may n o t be m a t e r i a l . However, i f s u c h m i s -s t a t e m e n t r e d u c e d w o r k i n g c a p i t a l b e low ,:an amount r e q u i r e d by a l o a n i n d e n t u r e and c a u s e d t h e e n t i r e 61 b a l a n c e o f t h e l o a n t o become p a y -a b l e , i t w o u l d be m a t e r i a l ( 4 ) . (b) w h e t h e r an i t e m i s , o r i s n o t , m a t e r i a l must be b a s e d on t h e p o i n t o f v i e w o f a r e a s o n a b l e p e r s o n o r an a v e r a g e p r u d e n t i n v e s t o r , as u s e r o f t h e f i n a n c i a l s t a t e m e n t s , and n o t b a s e d on t h e v i e i v p o i n t o f an a c c o u n t a n t who p r e p a r e s t h e s e s t a t e m e n t s . ( c ) A c c o r d i n g l y , a m a t e r i a l i t y d e c i s i o n must i n v o l v e c o n s i d e r a t i o n o f i t s l i k e l y e f f e c t on t h e j u d g e ment and c o n d u c t o f t h e r e a s o n -a b l e p e r s o n o r a v e r a g e p r u d e n t i n v e s t o r ; t h a t i s t o s a y , he must n o t be l e d i n t o m aking m i s l e a d i n g c o n c l u s i o n s as a r e s u l t o f n o n - d i s c l o s u r e , m i s - s t a t e m e n t , o r ommis-s i o n , o f an i t e m w h i c h , i n h i s o p i n i o n , i s m a t e r i a l . I t i s n o t d i f f i c u l t t o s e e t h a t a c c o u n t a n t s a r e s t i l l f a c e d w i t h p r o b l e m s , b e c a u s e t h e y w i l l have t o i d e n -t i f y who i s t h i s r e a s o n a b l e p e r s o n o r a v e r a g e p r u d e n t i n -v e s t o r , and t o d e t e r m i n e u n d e r what c i r c u m s t a n c e s an i t e m i s m a t e r i a l and u n d e r what c i r c u m s t a n c e s i t i s n o t m a t e r i a l . S t a t e m e n t s On M a t e r i a l i t y By O f f i c i a l l y - C o n s t i -t u t e d B o d i e s ; P r o n o u n c e m e n t s by o f f i c i a l a c c o u n t i n g b o d i e s 62 r e g a r d i n g m a t e r i a l i t y have a l s o n o t been t o o i n s t r u c t i v e , as t h e s e a r e , a l m o s t a l w a y s , e x p r e s s e d i n v e r y g e n e r a l t e r m s . T h u s , a c c o r d i n g t o one AICPA A c c o u n t i n g R e s e a r c h B u l l e t i n , i t i s s t a t e d t h a t ( 5 ) : t h e C o m m i t t e e c o n t e m p l a t e s t h a t i t s o p i n i o n w i l l have a p p l i c a t i o n o n l y t o i t e m s m a t e r i a l and s i g n i f i c a n t i n t h e r e l a t i v e c i r c u m s t a n c e s . I t c o n s i -d e r s t h a t i t e m s o f l i t t l e o r no s i g n i -f i c a n c e may be d e a l t w i t h as e x p e d i e n c y may s u g g e s t . The CICA* 3 A c c o u n t i n g and A u d i t i n g R e s e a r c h Commi-t t e e , i n m a k i n g a s i m i l a r p r o n o u n c e m e n t , d i s m i s s e s t h e mate-r i a l i t y q u e s t i o n i n a few s e n t e n c e s w h i c h a r e g i v e n i n t h e p r e f a c e o f i t s Handbook ( 6 ) . The s t a t e m e n t i s s u e d by t h e C o u n c i l o f The I n s t i -t u t e o f C h a r t e r e d A c c o u n t a n t s i n E n g l a n d and W a l e s , i s p r o b a b l y t h e most c o m p r e h e n s i v e o f t h e o f f i c i a l p r o n o u n c e -ments r e l a t i n g t o m a t e r i a l i t y ( 7 ) . Most s i g n i f i c a n t l y , i t i n d i c a t e s t h e v a r i o u s c i r c u m s t a n c e s i n w h i c h t h e q u e s t i o n o f m a t e r i a l i t y may a r i s e , and i t a l s o s u g g e s t s t h e f a c t o r s t h a t w i l l have t o be c o n s i d e r e d whenever t h e t e r m " m a t e r i a l " i s a p p l i e d t o any i t e m . A l t h o u g h t h i s may be a more d e t a i l e d s t a t e m e n t on m a t e r i a l i t y , t h e C o u n c i l makes c l e a r i n i t s b T h i s r e f e r s t o t h e C a n a d i a n I n s t i t u t e o f C h a r -t e r e d A c c o u n t a n t s . 63 i n t r o d u c t i o n that no p r e c i s e d e f i n i t i o n i s proposed ( 8 ) : The use of the word " m a t e r i a l " i n r e l a t i o n to accounting matters i s intended to give scope to a reasonably wide i n t e r p r e t a t i o n according to a v a r i e t y of circumstances which can a r i s e . I t i s not p o s s i b l e or d e s i r a -ble t h e r e f o r e to give a p r e c i s e d e f i -n i t i o n of such an e x p r e s s i o n . According to the United S t a t e s S e c u r i t i e s and Exchange Commission, under i t s R e g u a l t i o n S-X, the term " m a t e r i a l " i s ex p l a i n e d as f o l l o w s ( 9 ) : The term " m a t e r i a l " , when used to q u a l i f y a requirement f o r the f u r n i s h i n g of i n f o r m a t i o n as to any s u b j e c t , l i m i t s the i n f o r m a t i o n r e q u i r e d to those matters as to which an average prudent i n v e s t o r ought reasonably to be informed before purchasing the s e c u r i t i e s r e g i s t e r e d . J u s t who i s the "average prudent i n v e s t o r " , and what i s meant by "reasonably informed", however, are not defined nor can they be e a s i l y d e f i n e d . As be-f o r e , i n t e r p r e t a t i o n of t h e i r "exact" meanings appears to be the r e s p o n s i b i l i t y of the i n d i v i d u a l accountant. Some numerical g u i d e l i n e s f o r making m a t e r i a l i t y d e c i s i o n s are, however, l a i d down i n the Commission.'s R e g u l a t i o n S-X. As an example, i t i s s t i p u l a t e d that any a d d i t i o n to f i x e d a s s e t s , i f they exceed 5 per cent of the t o t a l a s s e t s , must be analysed. But t h i s and s i m i l a r requirements are intended p r i m a r i l y to deal w i t h d i s c l o s u r e 64 i n r e p o r t s to be f i l e d w i t h the Commission, and not w i t h m a t e r i a l i t y questions i n f i n a n c i a l statements w i t h stock-h o l d e r s . A p o s s i b l e e x p l a n a t i o n f o r p r a c t i c i n g accountants not a p p l y i n g these same g u i d e l i n e s to the l a t t e r i s the a r b i t r a r y manner i n which they are e s t a b l i s h e d ; consequent-l y , these standards are not based on c o n s i d e r a t i o n s such as those suggested by Dohr f o r the making of m a t e r i a l i t y d e c i s i o n s . M a t e r i a l i t y Of Items Considered In The Aggregate: Dohr's d e f i n i t i o n of m a t e r i a l i t y , however, does not c o n s i -der the cumulative e f f e c t s of a l a r g e number of s m a l l items. Thus, w h i l e such items, when taken s e p a r a t e l y , may not be m a t e r i a l l y s i g n i f i c a n t , t h i s may not be n e c e s s a r i l y true i f they are considered i n the aggregate. C l e a r l y , i f they are m a t e r i a l i n t o t a l , then t h e i r d i s c l o s u r e would be d e s i r a b l e . Hicks c i t e s the f o l l o w i n g example which i l l u s -t r a t e s t h i s point (10): Suppose that two extraneous g a i n s , each equal to 7 per cent of net income determined without them, are being c o n s i -dered f o r p o s s i b l e e x c l u s i o n from net income. Quite p o s s i b l y these items, taken i n d i v i d u a l l y , would not be considered mate-r i a l . To i n c l u d e them i n net income, how-ever, would i n c r e a s e the reported f i g u r e by 14 per cent, a d i f f e r e n c e much more l i k e -l y to represent m a t e r i a l i t y C l e a r l y , then, such items should be considered i n the aggregate. M a t e r i a l i t y O f S p e c i a l Items: While the amount 65 o f an i t e m ( o r t h e a g g r e g a t e d amount o f a c o l l e c t i o n o f r e l a t e d s m a l l i t e m s ) must be c o n s i d e r e d i n d e t e r m i n i n g i t s m a t e r i a l i t y , t h e r e may be c i r c u m s t a n c e s i n w h i c h , b e c a u s e o f t h e n a t u r e o f t h e i t e m , d i s c l o s u r e m i g h t be n e c e s s a r y , r e g a r d l e s s o f t h e amount. An example o f s u c h an i t e m i s " l o a n s t o o f f i c e r s " . The s p e c i a l r e l a t i o n s h i p between t h e s e i n d i v i d u a l s and t h e d i s c l o s i n g company makes d i s c l o -s u r e o f s u c h t r a n s a c t i o n s n e c e s s a r y , b u t " s u c h i n s t a n c e s , w h i l e i m p o r t a n t when t h e y o c c u r , a r e r a t h e r uncommon." ( I I ) N e v e r t h e l e s s , i t s h o u l d be c l e a r t h a t " t h e d e t e r m i n a t i o n o f t h e m a t e r i a l i t y o f an i t e m i n v o l v e s a c o n s i d e r a t i o n b o t h o f q u a n t i t a t i v e and q u a l i t a t i v e a s p e c t s . " (12) MEASUREMENT OF MATERIALITY A c c o r d i n g t o c u r r e n t a p p l i c a t i o n s o f t h e m a t e r i a l i t y c o n c e p t , a t l e a s t two p o s s i b l e m e a s u r e s a r e n o t e d w h i c h a r e d e s c r i b e d as f o l l o w s ( 1 3 ) : ( a ) A b s o l u t e M e a s u r e : M a t e r i a l i t y i s m e a s u r e d h e r e , u s i n g as t h e p o i n t o f c u t o f f , a f i x e d amount o f d o l l a r s f o r e a c h i t e m o r f o r e a c h c a t e g o r y o f i t e m s . T h u s an i t e m i s m a t e r i a l i f i t s a b s o l u t e d o l l a r amount i s , s a y , x d o l l a r s o r a b o v e , and i m m a t e r i a l i f i t i s b elow x d o l l a r s . 66 (b) R e l a t i v e M e a s u r e : I n t h i s c a s e , an i t e m u n d e r c o n s i d e r a t i o n i s e x p r e s s e d i n r e l a -t i o n s h i p t o some a p p r o p r i a t e b a s i s o f com-p a r i s o n ; u s u a l l y , t h i s i s a s i g n i f i c a n t l y r e l a t e d i t e m on t h e f i n a n c i a l s t a t e m e n t s . T h i s r e l a t i o n s h i p i s commonly s t a t e d as a p e r c e n t a g e . F o r ex a m p l e , an i t e m i s m a t e r i a l i f i t i s y p e r c e n t o f , s a y , n e t i n c o m e . An e m p i r i c a l s t u d y c o n d u c t e d by W o o l s e y (14) s u g g e s t s t h a t t h e r e l a t i v e measure i s f a v o u r e d compared t o a c t u a l d o l l a r amounts i n d e t e r m i n i n g m a t e r i a l i t y . I n f a c t , t h e s t a t e m e n t on m a t e r i a l i t y i s s u e d by t h e E n g l i s h I n s t i t u t e i n d i c a t e s t h a t " m a t e r i a l i t y c a n o n l y be c o n s i d e r e d i n r e l a t i v e t e r m s . " (15) The p r o b l e m w i t h t h e a b s o l u t e m easure i s t h a t t h e s i z e o f a b u s i n e s s u n i t may a f f e c t d e c i s i o n s on mate-r i a l i t y . T h u s , a s m a l l a b s o l u t e amount may w e l l be v e r y m a t e r i a l f r o m t h e s t a n d p o i n t o f a s m a l l f i r m , w h e r e a s a much l a r g e r amount may s t i l l n o t be m a t e r i a l i n t h e c a s e o f a v e r y l a r g e e n t e r p r i s e . I f t h e - a b s o l u t e measure i s u s e d , t h e r e f o r e , t h e r e may be d i f f i c u l t y i n e s t a b l i s h i n g t h e a p p r o p r i a t e q u a n t i t y o f d o l l a r s t h a t w o u l d a p p l y t o a l l f i r m s . T h i s i s n o t t o s a y t h a t t h e r e a r e no p r o b l e m s t o be e n c o u n t e r e d i n t h e p e r c e n t a g e method. What p e r c e n t a g e t o a p p l y and what r e l a t e d i t e m t o s e l e c t c e r t a i n l y p ose 67 d i f f i c u l t i e s . B u t t h e s e may be r e s o l v e d , i n p a r t a t l e a s t , i f i t can be e s t a b l i s h e d who i s t h i s a v e r a g e p r u d e n t i n -v e s t o r , and how a m a t e r i a l i t y d e c i s i o n may i n f l u e n c e h i s j u d g e m e n t ; t h e s e d i f f i c u l t i e s have been i n d i c a t e d i n t h e p r e c e d i n g s e c t i o n . A more s e r i o u s d i f f i c u l t y a s s o c i a t e d w i t h t h e r e l a t i v e measure i s t h e u n s t a b l e n a t u r e o f t h e b a s e u s e d f o r m e a s u r i n g m a t e r i a l i t y , e s p e c i a l l y so when t h a t b a s e i s c u r r e n t n e t i n c o m e . F o r e x a m p l e , i f t h e base i s 10 p e r c e n t o f c u r r e n t n e t i n c o m e , i t may w e l l be t h a t an i t e m o f a g i v e n amount i s r e g a r d e d as m a t e r i a l i n one y e a r s i n c e n e t i n c o m e f o r t h a t y e a r h a p p e ns t o be low, but as immate-r i a l i n t h e n e x t y e a r i f a c o n s i d e r a b l y h i g h n e t i ncome i s e a r n e d . " T h u s , a l a c k o f c o n s i s t e n c y i n r e p o r t i n g may l e a d t o e r r o n e o u s c o m p a r i s o n s among s e v e r a l y e a r s and e r r o -n e o u s p r e d i c t i o n s b a s e d on a p p a r e n t t r e n d s . " (16) P r o p e r d i s c l o s u r e , t h e r e f o r e , r e q u i r e s t h a t t h e base f o r d e t e r -m i n i n g m a t e r i a l i t y must be s t a b l e . I n s t e a d o f u s i n g c u r r e n t n e t income as t h e b a s e , t h e " g r o s s p r o f i t on s a l e s " may be c o n s i d e r e d more a p p r o p r i a t e b e c a u s e p e r c e n t a g e v a r i a t i o n s o f g r o s s p r o f i t between one y e a r and a n o t h e r a r e much l e s s ; t h u s , i t may be a r e l a t i v e l y more s t a b l e b a s e t o use v i s - a - v i s t h a t o f c u r r e n t n e t i n c o m e . Carman B l o u g n , on t h e o t h e r hand, s u g g e s t s t h a t 68 " i n j u d g i n g t h e m a t e r i a l i t y o f an amount, i t s h o u l d be c o n -s i d e r e d i n r e l a t i o n t o t h e n e t i n c o m e o f t h e company o v e r a p e r i o d o f y e a r s . " (17) B e r n s t e i n adds t h a t a f i v e - y e a r a v e r a g e s h o u l d be a d e q u a t e f o r t h i s p u r p o s e , so l o n g as t h e i ncome f i g u r e t o be u s e d i s r e p r e s e n t a t i v e o f a r e c e n t e a r n i n g s l e v e l ( 1 8 ) . Summing up, a l t h o u g h t h e r e may be d i f f i c u l t i e s , as w e l l , i n u s i n g t h e r e l a t i v e m e asure t o d e t e r m i n e mate-r i a l i t y , i t i s , n e v e r t h e l e s s , g e n e r a l l y c o n s i d e r e d t o be a more r e a s o n a b l e method t h a n t o d e t e r m i n e m a t e r i a l i t y i n t e r m s o f a b s o l u t e amounts. ROLE OF JUDGEMENT IN DETERMINING MATERIALITY The s i g n i f i c a n c e o f o b j e c t i v i t y i n t h e r e p o r t i n g o f a c c o u n t i n g d a t a c a n n o t be o v e r - s t r e s s e d . As P a t o n and L i t t l e t o n p o i n t e d o u t ( 1 9 ) : V e r i f i a b l e , o b j e c t i v e e v i d e n c e has t h e r e f o r e become an i m p o r t a n t e l e m e n t i n a c c o u n t i n g and a n e c e s s a r y a d j u n c t t o t h e p r o p e r e x e c u t i o n o f t h e a c c o u n t i n g f u n c t i o n o f s u p p l y i n g d e p e n d a b l e i n f o r m a t i o n . Y e t , as t h e p r e c e d i n g d i s c u s s i o n s showed, t h e r e a p p e a r s t o be no " g e n e r a l l y a c c e p t e d " o r o f f i c i a l l y p r o -n o u n c e d g u i d e l i n e s by w h i c h m a t e r i a l i t y c a n be a p p r o a c h e d o b j e c t i v e l y . I t has been s u g g e s t e d t h a t t h i s a b s e n c e o f 69 g u i d e l i n e s " m e r e l y s e r v e s t o e m p h a s i z e t h e f a c t t h a t t h e p r o b l e m i n v o l v e d i s l a r g e l y a m a t t e r o f judgement t o be e x e r c i s e d i n t h e l i g h t o f t h e t h e n - e x i s t i n g s u r r o u n d i n g c i r c u m s t a n c e s . " ( 2 0 ) T h a t j u d g ement p l a y s an i m p o r t a n t p a r t i n t h e q u e s t i o n o f m a t e r i a l i t y i s c l e a r l y s u g g e s t e d f r o m t h e f o l l o w i n g c o n s i d e r a t i o n s : (a) S i n c e d e c i s i o n s on m a t e r i a l i t y c a n n o t be made i n a vacuum, but must be b a s e d on t h e s u r -r o u n d i n g c i r c u m s t a n c e s , i t i s e v i d e n t t h a t t h e e x e r c i s e o f j u d g e m e n t i s i n e v i t a b l e , f o r c i r c u m s t a n c e s a r e s u b j e c t t o c h a n g e and a l s o , t h e s e c i r c u m s t a n c e s c a n n o t be e a s i l y d e s c r i b -ed w i t h i n a s e t o f g i v e n r u l e s . (b) The p r o f e s s i o n a l j u d g e ment o f an a c c o u n t a n t i s a l s o r e q u i r e d t o j u d g e t h e e f f e c t o f h i s m a t e r i a l i t y d e c i s i o n on t h e o p i n i o n and c o n -d u c t o f an a v e r a g e p r u d e n t i n v e s t o r w i t h r e g a r d t o t h e f i n a n c i a l s t a t e m e n t s . ( c ) The l a c k o f a c o n s e n s u s among a c c o u n t a n t s on who i s t h e a v e r a g e p r u d e n t i n v e s t o r i s , p r o b a b l y , p a r t l y a r e s u l t o f d i f f e r e n c e s o f j u d g e m e n t . F o r e x a m p l e , one h o l d s t h e v i e w t h a t s u c h a p e r s o n i s t o be f o u n d among 70 "the approximately 18 m i l l i o n American s t o c k -holders." (21) Another b e l i e v e s that materia-l i t y d e c i s i o n s must be made w i t h investment p r o f e s s i o n a l s i n mind such as the f i n a n c i a l a n a l y s t s (22). Yet another r e f e r s to the "standard reader", who, i n h i s judgement, i s a person between the uninformed and the ex-pert (23). (d) C l e a r l y , i f the above c o n s i d e r a t i o n s which must enter i n t o the making of a m a t e r i a l i t y d e c i s i o n r e q u i r e s the e x e r c i s e of judgement, then i t f o l l o w s that s e l e c t i n g the basis of comparison and d e c i d i n g whether a given per-centage r e l a t i o n s h i p e s t a b l i s h e s m a t e r i a l i t y , must i n e v i t a b l y a l s o be based on judgement. The comment by Carman Blough a p t l y sums up the importance of judgement i n the question of m a t e r i a l i t y (24): The question of what i s m a t e r i a l has puzzled a great many people over a great many years, yet nobody i s prepared to d e f i n e i t so that i t does not u l t i - < mately r e s t on someone's judgement. NEED F O R SPECIFIC GUIDELINES I t must be admitted that i t can never be p o s s i b l e to r e s o l v e the problem of m a t e r i a l i t y on an e n t i r e l y objec-7 1 t i v e b a s i s . I n e v i t a b l y , personal judgement w i l l always pl a y a part i n d e c i s i o n s on m a t e r i a l i t y . But, at the same time, to submit a l l m a t e r i a l i t y d e c i s i o n s to the p r o f e s s i o -n a l judgement of i n d i v i d u a l accountants i s not a s a t i s f a c -t o r y s o l u t i o n e i t h e r . The reason i s t h a t , "although t h e o r e c t i c a l l y two q u a l i f i e d accountants should reach the same d e c i s i o n as to the m a t e r i a l i t y of a given item, i n p r a c t i c e o p i n i o n s are sometimes e x a c t l y opposite even though a l l the surrounding circumstances are known to both." (25) Therefore, i f the a p p l i c a t i o n of judgement must be a necessary part of the m a t e r i a l i t y decision-making process, and a l s o , s i n c e the judgements by accountants are subj e c t to s u b s t a n t i a l v a r i a t i o n s , i t seems ap p r o p r i a t e that there should be e s t a b l i s h e d some form of o b j e c t i v e standards w i t h which to guide the a p p l i c a t i o n of that judge-ment (26). I t may a l s o be p o s s i b l e , through w e l l - d e f i n e d g u i d e l i n e s , to narrow down the area where judgement i s at present being e x e r c i s e d . T h i s p o i n t i s i l l u s t r a t e d i n the subsequent s e c t i o n when some suggested g u i d e l i n e s by va r i o u s w r i t e r s are reviewed. Thus, by r e q u i r i n g that judgement i s made w i t h -i n the framework of these g u i d e l i n e s , accountants, are more l i k e l y to a r r i v e at the same m a t e r i a l i t y d e c i s i o n for the same type of s i t u a t i o n . In other words, there i s l i k e l y to be greater c o n s i s t e n c y i n the treatment of the 72 m a t e r i a l i t y q u e s t i o n . T h i s i s i m p o r t a n t b e c a u s e d i f f e -r e n c e s o f d i s c l o s u r e i n t h e f i n a n c i a l s t a t e m e n t s o f c o r p o -r a t i o n s t o d a y w o u l d seem t o be a t t r i b u t a b l e , i n p a r t a t l e a s t , t o t h e l a c k o f a common a p p r o a c h i n t h e i n t e r p r e t a -t i o n and a p p l i c a t i o n o f t h e c o n c e p t o f m a t e r i a l i t y . T u r n i n g t o t h e f e a s i b i l i t y o f d e v e l o p i n g t h e s e g u i d e l i n e s , t h e e m p i r i c a l s t u d y by W o o l s e y i n d i c a t e s t h a t " t h e r e was enough u n i f o r m i t y i n t h e r e s p o n d e n t s ' a n s w e r s t o s u g g e s t t h a t i t m i g h t be p r a c t i c a b l e t o e s t a b l i s h f o r , _ e a c h t y p e o f m a t e r i a l i t y d e c i s i o n a c e n t r a l i s e d b r a c k e t ( u s u a l l y t h e most i m p o r t a n t r e l a t e d f a c t o r as a b a s e ) w i t h u p p e r and l o w e r l i m i t s t o a i d t h e a c c o u n t a n t o r a u d i t o r i n r e a c h -i n g h i s p r i m a r y d e c i s i o n on m a t e r i a l i t y . " (27) T h i s i s e l a b o r a t e d i n t h e f o l l o w i n g s e c t i o n . SOME SUGGESTED GUIDELINES TO MATERIALITY A l t h o u g h t h e ne e d f o r o b j e c t i v e s t a n d a r d s t o mate-r i a l i t y measurement i s r e c o g n i s e d by a m a j o r i t y o f w r i t e r s on t h e s u b j e c t , t h e r e i s , however, no g e n e r a l a g r e e m e n t on what s h o u l d be t h e a p p r o p r i a t e g u i d e l i n e s . As a r e s u l t , v a r i o u s g u i d e l i n e s have been s u g g e s t e d . N e v e r t h e l e s s , i t i s o b s e r v e d t h a t , most commonly, t h e y a r e : (a) S i n g l e P e r c e n t a g e G u i d e l i n e : i h i s i s b a s e d on t h e r e l a t i v e measure t h a t was e x p l a i n e d e a r l i e r . O n l y a s i n g l e p o i n t o f c u t - o f f w i l l 73 be used as the g u i d e l i n e . For example, Hylton suggests that the c r i t e r i o n f o r measuring the m a t e r i a l i t y of a balance-sheet item should be 5 per cent of i t s r e l a t e d t o t a l ; f o r an item on the income statement, he recommends a c u t - o f f p o i n t of 2 per cent of gross p r o f i t on s a l e s (28). I t might be noted that the s i n g l e percentage g u i d e l i n e i s a l s o a p p l i e d to determine what should be ade-quate i n f o r m a t i v e d i s c l o s u r e f o r r e p o r t i n g of conglomerate companies. Thus, Mautz has "recommended that conglomerates re p o r t both s a l e s and r e l a t i v e c o n t r i b u t i o n to corporate net income f o r any segment of t h e i r business generating 15 per cent or more of gross s a l e s revenue." (29) The United S t a t e s S e c u r i t i e s and Exchange Commission, however, proposed a 10 per cent g u i d e l i n e (30). I t i s not d i f f i c u l t to see the shortcomings of the above g u i d e l i n e . F i r s t , the g u i d e l i n e seems to d i s -regard t o t a l l y the element of judgement t h a t , as already pointed out, must i n e v i t a b l y enter i n t o a m a t e r i a l i t y d e c i s i o n . Second, i t i s extremely d i f f i c u l t to j u s t i f y why, say, 2 per cent of gross p r o f i t on s a l e s should be accepted as m a t e r i a l , but one of, say, 1.9 per cent should be regarded as i m m a t e r i a l . 74 (b) Percentage Range G u i d e l i n e : This i s a l s o based on the n o t i o n of r e l a t i v e m a t e r i a l i t y but, i n t h i s case, the g u i d e l i n e c o n s i s t s of two-cut-off p o i n t s , an upper c u t - o f f p o i n t above which an item should be considered m a t e r i a l , and a lower c u t - o f f p o i n t below which the item would be regarded as immate-r i a l . Woolsey se t s out the g u i d e l i n e as f o l l o w s (31): ( i ) A base (the most important f a c t o r w i t h which the item i n question w i l l be com-pared ) . ( i i ) An area of doubt (expressed as a percen-tage of the base). Items below the lower l i m i t of the area would be considered i m m a t e r i a l and those above would be c o n s i -dered m a t e r i a l . Eor the given circum-stances, items between the l i m i t s could be considered e i t h e r m a t e r i a l or not ma t e r i a l . ( i i i ) Where a p p r o p r i a t e , the percentage i n the area of doubt should be changed on an o b j e c t i v e b a s i s i f surrounding circum-stances were s u b s t a n t i a l l y d i f f e r e n t from the standard case s i t u a t i o n . Thus, according to the r e s u l t s of h i s a n a l y s i s of the response to h i s case-study q u e s t i o n a i r e s , by p r a c t i s i n g accountants, s e c u r i t i e s a n a l y s t s , investment bankers, e t c . , Woolsey suggests a border zone of 5 to 15 per cent of the c u r r e n t year's income before tax as the g u i d e l i n e f o r d e t e r -mining the m a t e r i a l i t y of income statement items (32). 75 The advantages of e s t a b l i s h i n g such a border zone or area of doubt are apparent. F i r s t , t h i s g u i d e l i n e r e c o gnises the need f o r the e x e r c i s e of judgement and that there can never be complete o b j e c t i v i t y i n a r r i v i n g at m a t e r i a l i t y d e c i s i o n s , as would be i m p l i e d by the s i n g l e percentage g u i d e l i n e . W i t h i n the zone of doubt, t h e r e f o r e , m a t e r i a l i t y must be judged on the b a s i s of the surround-ing circumstances. Second, by using a border zone, i t i s p o s s i b l e to r e s t r i c t the area of judgement to a narrow range of 5 to 15 per cent as s t a t e d above and, i n t h i s way, " i t provides the (accounting) p r o f e s s i o n and the users of f i n a n c i a l statements w i t h a known and e x p l i c i t l y s t a t e d norm." ( 3 3 ) . B e r n s t e i n i s a l s o i n favour of using the percen-tage g u i d e l i n e f o r the advantages j u s t c i t e d ( 3 4 ) . But the f i n d i n g s of h i s e m p i r i c a l research seem to suggest a border zone of 10 to 15 per cent of average net income ( f i v e - y e a r average) as the p o i n t s of c u t - o f f . I t i s obser-ved t h a t B e r n s t e i n uses the average net income as the base; the advantage of t h i s has already been noted. Other Suggestions: Patterson b e l i e v e s t h a t , i n developing c r i t e r i a f o r m a t e r i a l i t y , one should take i n t o c o n s i d e r a t i o n , as w e l l , the economic environment surround-ing the business e n t e r p r i s e . He e x p l a i n s why, given i d e n -t i c a l f i g u r e s , a 10 per cent f a c t o r of m a t e r i a l i t y would 76 apply i n one case and y e t , i n another case, i t should be 15 per cent (35 ) : The d i f f e r e n t i a t i n g element would be the nature of business and the economic environment i n which i t operates. For i n s t a n c e , we would expect a f i n a n c i a l i n s t i t u t i o n to be able to d e f i n e i t s a s s e t s , l i a b i l i t i e s , and net income more a c c u r a t e l y than a commodity whol e s a l e r . The d i f f e -rence i n the degree of accuracy would not be a t t r i b u t a b l e to the c o n d i t i o n of the account-ing records but r a t h e r to the surrounding economic environment. But i t can be argued t h a t , whenever a judgement has to be made i n the l i g h t of the "surrounding circum-stances" (assuming, of course, the percentage range mate-r i a l i t y g u i d e l i n e i s used), i t must i n e v i t a b l y i n c l u d e c o n s i d e r a t i o n of the economic environment. R e i n i n g a , however, i s opposed to e s t a b l i s h i n g s p e c i f i c standards f o r m a t e r i a l i t y . Hence, h i s suggestion would seem to leave much scope f o r the e x e r c i s e of judgement though, i t should be noted t h a t , i n h i s case, the judgement would have a more o b j e c t i v e b a s i s than otherwise would be the case. Thus, according to R e i n i n g a , a s o l u t i o n to the m a t e r i a l i t y problem may be found by an a n a l y s i s of s p e c i f i c cases to determine the judgemental or thought processes i n v o l v e d (36). In t h i s way, he argues, how and why p a r t i -c u l a r m a t e r i a l i t y d e c i s i o n s are made may be b e t t e r under-77 stood. In other words, he suggests that d e c i s i o n s on m a t e r i a l i t y should be w r i t t e n up and documented; t h i s i n f o r m a t i o n w i l l then be made a v a i l a b l e to other p r a c t i c i n g accountants f o r e v a l u a t i o n . The idea of w r i t i n g up the d e t a i l s and f a c t s i n v o l v e d i s e s p e c i a l l y appropos f o r the s o l u t i o n of the problems surround-i n g the m a t e r i a l i t y concept. How e l s e can we l e a r n what i s important to contemplate, to weigh or to consider when we are ponder-in g over a m a t e r i a l i t y d e c i s i o n ? How e l s e can we l e a r n what are the g e n e r a l l y accept-ed p r a c t i c e s ? ( 3 7 ) A s e r i e s of a c t u a l case s t u d i e s along the l i n e s suggested by R e i n i n g a , i n the opinion of t h i s w r i t e r , might a l s o be u s e f u l as a b a s i s , i n a d d i t i o n to o t h e r s , for d e t e r -mining what should be the border zone. From the foregoing d i s c u s s i o n , t h e r e f o r e , i t would seem that an ap p r o p r i a t e g u i d e l i n e should make a l l o -wance f o r the e x e r c i s e of judgement w h i l e , at the same time, i t should provide f o r a c e r t a i n degree of o b j e c t i v i t y i n m a t e r i a l i t y measurement, c o n s i d e r i n g the importance of the m a t e r i a l i t y question i n the e v a l u a t i o n of adequate d i s c l o s u r e . A c c o r d i n g l y , the percentage range g u i d e l i n e which takes i n t o c o n s i d e r a t i o n both of these f a c t o r s would seem to have much m e r i t , at l e a s t c o n c e p t u a l l y , as a mater i a -l i t y g u i d e l i n e . The p r a c t i c a l d i f f i c u l t i e s are recognised l i k e e s t a b l i s h i n g what should be the c u t - o f f p o i n t s , but 78 these might be r e s o l v e d through more extensive r e s e a r c h on t h i s question of m a t e r i a l i t y . SUMMARY I t i s c l e a r that m a t e r i a l i t y i s c l o s e l y r e l a t e d to d i s c l o s u r e , f o r adequate d i s c l o s u r e r e q u i r e s that only m a t e r i a l items that are l i k e l y to i n f l u e n c e the conduct and judgement of an average prudent i n v e s t o r , should be d i s c l o s e d , whereas im m a t e r i a l items which might c l u t t e r up the f i n a n c i a l statements, should not be d i s c l o s e d . The d i f f i c u l t y , however, l i e s i n determining what i s m a t e r i a l and what i s not m a t e r i a l . The absence of o f f i c i a l g u i d e l i n e s on m a t e r i a l i t y suggests that t h i s pro-blem i s f a r from r e s o l v e d . As a r e s u l t , present p r a c t i c e , seems to place much r e l i a n c e upon the p r o f e s s i o n a l judge-ment of the p r a c t i c i n g accountant f o r determining m a t e r i a -l i t y . The wide range i n judgement among accountants reg a r d i n g the m a t e r i a l i t y of an item p o i n t s to the need fo r s p e c i f i c g u i d e l i n e s so that m a t e r i a l i t y d e c i s i o n s can be made on a more o b j e c t i v e b a s i s . Of the v a r i o u s guide-l i n e s mentioned, probably the percentage range m a t e r i a l i t y g u i d e l i n e would be most ap p r o p r i a t e f o r reasons already s t a t e d . An e x p l i c i t g u i d e l i n e would provide a common 79 a p p r o a c h i n t h e i n t e r p r e t a t i o n and a p p l i c a t i o n o f t h e m a t e r i a l i t y c o n c e p t w h i c h , i n t u r n w o u l d c o n t r i b u t e t o w a r d b e t t e r d i s c l o s u r e i n s o f a r as i n a d e q u a t e d i s c l o s u r e i s a r e s u l t o f n o t u n d e r s t a n d i n g c l e a r l y what i s meant by m a t e r i a l i t y . 80 F o o t n o t e s I M i c h a e l N. C h e t k o v i c h , "Standards Of D i s c l o s u r e And T h e i r Development," J o u r n a l of Accountancy, December, 1955, p. 50. 2 E d i t o r i a l , " M a t e r i a l i t y , " J o u r n a l of Accountancy, A p r i l , 1964, p. 36. 3 James L. Dohr, " M a t e r i a l i t y : What Does I t Mean In Accounting?" J o u r n a l of Accountancy, J u l y , 1950, p. 56. 4 Joseph J . Hyde, " M a t e r i a l i t y D e f i n e d , " ( C o r r e s -pondence), J o u r n a l of Accountancy, November, 1961, p. 36. 5 Accounting Research B u l l e t i n , No. 43, 1953, American I n s t i t u t e of C e r t i f i e d P u b l i c Accountants, p. 9. 6 CICA Handbook, The Canadian I n s t i t u t e of Char-t e r e d Accountants, 250 B l o o r S t r e e t E a s t , Toronto 5, p. 8. 7 The I n t e r p r e t a t i o n Of " M a t e r i a l " In R e l a t i o n To  Accountants, The I n s t i t u t e of C h a r t e r e d Accountants i n England and Wales, 1968. See The Accountant, J u l y 27th, 1968, pp. I I 6 - I I 7 . 8 I b i d . 9 United S t a t e s S e c u r i t i e s and Exchange Commission, R e g u l a t i o n S-X, Paragraph 1.02. 10 E r n e s t L. H i c k s , " M a t e r i a l i t y " , J o u r n a l of Accoun-t i n g Research, V o l . 2, No. 2, 1964, p. 167. I I I b i d . , p. 164. 12 M i c h a e l N. C h e t k o v i c h , op. c i t . , p. I I . 13 Delmer P. H y l t o n , "Some Comments On M a t e r i a l i t y , " J o u r n a l of Accountancy, September, 1961, p. 62. 81 14 Sam M. Woolsey, "Development Of C r i t e r i a To Guide The Accountant In Judging M a t e r i a l i t y , " J o u r n a l of  Accountancy, February, 1954, pp. 167-173. 15 The I n s t i t u t e of Chartered Accountants i n Eng-land and Wales, 1968, op. c i t . , para. 7. 16 Eldon S. Hendriksen, Accounting Theory, (Home-wood, I l l i n o i s : R i c h a r d D. I r w i n , I nc., Revised E d i t i o n , 1968), Chapter 19, p. 563. 17 Carmen G. Blough, "Some Suggested C r i t e r i a For Determining ' M a t e r i a l i t y ' " , J o u r n a l of Accountancy, (Current Accounting and A u d i t i n g Problems S e c t i o n ) , J u l y , 1950, p. 353. 18 Leopold A. B e r n s t e i n , "The Concept of M a t e r i a -l i t y , " Accounting Review, January, 1967, p. 89. 19 W.A.Paton and A . C . L i t t l e t o n , An I n t r o d u c t i o n  To Corporate Accounting Standards, American Accounting A s s o c i a t i o n Monograph No. 3, 1940, p. 18. - 20 James L. Dohr, op• c i t . , p. 54. 21 Ernest L. H i c k s , op. c i t . , p. 160. 22 See, f o r example, Donald Rappaport, " M a t e r i a l i t y , " J o u r n a l of Accountancy, A p r i l , 1964, p. 42. 23 Michael N. Chetkovich, op. c i t . , p. 49. 24 Carman G. Blough, "What Is Net Income? And Why?" The V i r g i n i a Accountant, October, 1949, p. 13, as quoted by Ernest L. H i c k s , op. c i t . , p. 170. 25 Sam M. Woolsey, "Judging M a t e r i a l i t y In Deter-mining Requirements For F u l l D i s c l o s u r e , " J o u r n a l of  Accountancy, December, 1954, p. 750. 82 26 I b i d . 27 I b i d . 28 Delmer P. H y l t o n , op. c i t . , p. 64. 29 See, f o r example, Paul A. P a c t e r , "Conglomerate Rep o r t i n g The Debate Continues," J o u r n a l of Accountancy, March, 1969, p. 24. 30 I b i d . , p. 26. 31 Sam M. Woolsey, " O b j e c t i v e Bases For Making M a t e r i a l i t y D e c i s i o n s , " The Accountant, October I 2 t h , 1968, p. 478. 32 See Footnote 12, p. 170. 33 Leopold A. B e r n s t e i n , op. c i t . , p. 9 3 . 34 I b i d . 35 Robert G. P a t t e r s o n , " M a t e r i a l i t y And The Economic Environment," accounting Review, October, 1967, pp. 772-774. 36 Warren R e i n i n g a , "The Unknown M a t e r i a l i t y Concept," J o u r n a l of Accountancy, February, 1968, pp. 30-35 . 37 I b i d . , p. 34. CHAPTER FOUR "COST" EFFECTS OF FULL DISCLOSURE By p r o v i d i n g o b j e c t i v e b a s e s f o r m aking mate-r i a l i t y d e c i s i o n s , w h i l e i m p o r t a n t i n t h e q u e s t i o n o f c o r p o r a t e d i s c l o s u r e , does n o t , however, i m p l y t h a t a c o r p o r a t i o n w i l l n e c e s s a r i l y o r w i l l i n g l y d i s c l o s e f u l l y i n f o r m a t i o n a b o u t i t s a c t i v i t i e s . T h i s i s i n s p i t e o f t h e p o s s i b l e b e n e f i t s , w h i c h have been c o n s i d e r e d i n c h a p t e r two, t h a t m i g h t a c c r u e t o t h e d i f f e r e n t i n t e r e s t e d o u t -s i d e r s and, i n d e e d , t o c o r p o r a t e management as w e l l . I n f a c t , t h e c o r p o r a t e v i e w p o i n t w o u l d seem t o be t h a t f u l l d i s c l o s u r e o f c o r p o r a t e i n f o r m a t i o n m i g h t n o t be i n t h e c o r p o r a t i o n ' s b e s t i n t e r e s t s . Hence, management i s , i n g e n e r a l , r e l u c t a n t t o d i v u l g e more i n f o r m a t i o n t h a n what w o u l d be r e q u i r e d by law w h i c h , as has been n o t e d , u s u a l l y p r o v i d e s f o r o n l y minimum d i s c l o s u r e . I n t h i s c h a p t e r , t h e r e f o r e , t h e r a t i o n a l e o f t h i n k i n g by c o r p o r a t e management w i l l be e x a m i n e d as r e g a r d s t h e i r o p p o s i t i o n t o f u l l d i s c l o s u r e . S p e c i f i c a l l y , t h e f o c u s w i l l be on what p o s s i b l e " c o s t " e f f e c t s , i n p a r t i c u -l a r f r o m t h e c o r p o r a t e v i e w p o i n t , may r e s u l t f r o m s u c h d i s c l o s u r e . 84 MEANING OF "COST" I t s h o u l d be p o i n t e d o u t t h a t t h e t e r m " c o s t " , as u s e d i n t h i s c o n t e x t , has a w i d e r m eaning t h a n j u s t t h e e x p l i c i t c o s t as i t i s more commonly u n d e r s t o o d . T h u s , by " c o s t " , i n d i s c u s s i n g t h e c o s t e f f e c t s o f f u l l d i s c l o -s u r e , i s meant: (a) a c t u a l c o s t , v i z . , t h e e x p e n s e s t h a t a r e a c t u a l l y i n c u r r e d i n a d d i t i o n a l d a t a c o l l e c -t i o n , c l a s s i f i c a t i o n and p r e s e n t a t i o n . (b) p o s s i b l e f u t u r e c o s t , f o r e x a m p l e , c o s t t o management i n m e e t i n g t r a d e u n i o n demands f o r i m p r o v e d wages, and c o s t a r i s i n g o u t o f l e g a l a c t i o n i n s t i t u t e d a g a i n s t t h e manage-ment . ( c ) s o c i a l c o s t , f o r e x a m p l e , l o s s o f i n c e n t i v e f o r t e c h n o l o g i c a l i n n o v a t i o n , and r i s k o f m i s i n t e r p r e t a t i o n o f c o r p o r a t e i n f o r m a t i o n w h i c h r e s u l t s i n m i s - i n v e s t m e n t o f t h e n a t i o n ' s s c a r c e c a p i t a l r e s o u r c e s . ( d ) i n j u r y t o t h e c o m p e t i t i v e p o s i t i o n o f a d i s c l o s i n g e n t e r p r i s e w h i c h , by r e d u c i n g i t s p r o f i t - m a k i n g c a p a b i l i t y 'r Imay a f f e c t i t s e x p a n s i o n p l a n s , d i v i d e n d s d i s t r i b u t e d , and t h e m a r k e t v a l u a t i o n s f o r i t s s e c u r i t i e s . 85 INJURY TO COMPETITIVE POSITION OF DISCLOSING CORPORATION Much of the o p p o s i t i o n to f u l l d i s c l o s u r e of b u s i n e s s i n f o r m a t i o n by c o r p o r a t e management i s based on the h y p o t h e s i s t h a t such d i s c l o s u r e might have to i n c l u d e what may be d e s c r i b e d as a c o r p o r a t i o n ' s s t r a t e g i c i n f o r m a -t i o n . By s t r a t e g i c i n f o r m a t i o n i s meant any b u s i n e s s i n f o r m a t i o n which accords or may a c c o r d the possessor an advantage over h i s c o m p e t i t o r s who do not have such i n f o r m a -t i o n . S p e c i f i c examples are f u t u r e plans and e x p e c t a t i o n s , i n d u s t r i a l p r o c e s s e s , r e s e a r c h and development data, s a l e s or gross p r o f i t s by p r o d u c t s , or e x p e n d i t u r e s by types of a d v e r t i s i n g . C l e a r l y , from the c o r p o r a t e p a i n t of view, such i n f o r m a t i o n , i f g i v e n p u b l i c exposure, might cause the r e p o r t i n g c o r p o r a t i o n to l o s e i t s c o m p e t i t i v e advantage o r , to put i t i n another way, might r e s u l t i n p o s s i b l e compe-t i t i v e i n j u r y to the c o r p o r a t i o n . In a p r i v a t e - e n t e r p r i s e , p r o f i t - o r i e n t e d economy where c o m p e t i t i o n i s a f a c t of l i f e , s u r v i v a l of a b u s i n e s s e n t e r p r i s e and i t s c a p a c i t y to make p r o f i t (which i s i n f a c t the r a t i o n a l e f o r i t s e x i s t e n c e ) must c e r t a i n l y be dependent upon i t s a b i l i t y to compete. However, i n order to have the s t r e n g t h to compete and to maximize p r o f i t s , (and, i n t h i s way, i n c r e a s e d i v i d e n d s as w e l l as enhance the market v a l u e of a c o r p o r a t i o n ' s s t o c k ) , w i t h h o l d i n g 86 of s t r a t e g i c i n f o r m a t i o n by a c o r p o r a t i o n might appear to be reasonable, f o r t h i s may be one means by which the c o r p o r a t i o n would be able to have an advantage over i t s c o m p e t i t o r s . In other words, i t i s p o s s i b l e to make out a case t h a t f u l l d i s c l o s u r e may be c o m p e t i t i v e l y harmful to a c o r p o r a t i o n and t h a t , t h e r e f o r e , some secrecy of corporate i n f o r m a t i o n may be d e s i r a b l e f o r the c o r p o r a -t i o n to maintain i t s competitiveness v i s - a - v i s i t s r i v a l s . C ompetitive R i s k In D i s a g g r e g a t i v e D i s c l o s u r e : D i s c l o s u r e i n s p e c i f i c , d e t a i l e d or d i s a g g r e g a t i v e form which has been urged by i n t e r e s t e d o u t s i d e r s as a b a s i s f o r conglomerate r e p o r t i n g , i s s a i d to " a i d competitors i n determining when, how, and i n what areas to apply pressure, which could reduce the c o m p e t i t i v e advantage that the r e p o r t i n g company otherwise would have." (I) As an example, a company might have developed a new process f o r manufacturing a c e r t a i n product more econo-m i c a l l y and, i n t h i s way, i t i s able to r e p o r t a p r o f i t higher than normal f o r that product l i n e . I t i s apparent that t h i s d i s c l o s u r e of i t s p r o f i t a b i l i t y would make i t v u l n e r a b l e to i n c r e a s e d c o m p e t i t i o n . A competitor might be induced to d i r e c t i t s e f f o r t s to improving i t s own methods and techniques, and then to enter i n t o stronger competition w i t h the company's product. 87 As another example, a company might r e p o r t a p r o f i t l e s s than normal or even a l o s s f o r a product l i n e because of hig h i n i t i a l r e s e a r c h , development, and s t a r t -up c o s t s i n c o n n e c t i o n with a new product. T h i s d i s c l o -sure c o u l d i n v i t e c o m p e t i t o r s i n t o the f i e l d sooner than they would o t h e r w i s e . Concern has a l s o been expressed by c o r p o r a t e e x e c u t i v e s i n American i n d u s t r i e s t h a t d i s c l o s u r e on a d i s a g g r e g a t i v e b a s i s might r e v e a l v a l u a b l e i n f o r m a t i o n to f o r e i g n c o m p e t i t o r s , e s p e c i a l l y because many f o r e i g n companies do not p u b l i s h such data nor are they s u b j e c t to d i s c l o s u r e requirements to the exte n t comparable to those i n the Un i t e d S t a t e s . Hence, i t would seem t h a t e x p o r t - o r i e n t e d American c o r p o r a t i o n s would be p l a c e d at a c o m p e t i t i v e disadvantage v i s - a - v i s t h e i r f o r e i g n r i v a l s . The f o l l o w i n g comment of an American e x e c u t i v e i s p e r t i -nent ( 2 ) : Another source of o b j e c t i o n to product l i n e p r o f i t r e p o r t i n g i s that c o m p e t i t o r s p a r t i c u l a r l y f o r e i g n c o m p e t i t o r s would r e a c t to the company's d e t r i m e n t . American c h e m i c a l companies are engaged i n world-wide c o m p e t i t i o n ; f o r e i g n c o m p e t i t o r s g i v e no p r o f i t f i g u r e s and cannot be made to do so. T h i s i s a very important c o n s i d e r a t i o n to our company. Other arguments a g a i n s t more d e t a i l e d d i s c l o s u r e are r e f l e c t e d i n the f o l l o w i n g comments by c o r p o r a t e execu-88 t i v e s (3): (a) We would be concerned about r e v e a l i n g i n f o r m a t i o n to competitors. This i s important i n our i n d u s t r y because of bidding on government c o n t r a c t s . (b) We operate i n 10 d i f f e r e n t i n d u s t r i e s . In some of these indus-t r i e s , we compete w i t h f a m i l y con-t r o l l e d companies that do not have to r e p o r t p u b l i c l y . In these i n d u s t r i e s we perform a s e r v i c e which i s f e e - n e g o t i a t e d . We would be i n an u n f a i r p o s i t i o n i n n e g o t i a -t i n g c o n t r a c t s . Summing up, i f d i s c l o s u r e i s d e s i r e d to be s p e c i f i c and i n d e t a i l or on a d i s a g g r e g a t i v e b a s i s , i t would seem that s t r a t e g i c i n f o r m a t i o n might be rev e a l e d to competitors about ( 4 ) : (a) p r o f i t a b l e or u n p r o f i t a b l e products, (b) plans f o r new products or e n t r i e s i n t o new markets, (c) apparent weaknesses which might induce compe-t i t o r s to i n c r e a s e t h e i r own e f f o r t s to take advantage of the weaknesses, (d) the e x i s t e n c e of advantages not otherwise i n d i c a t e d . P o s s i b l e E f f e c t s On P r o f i t P o s i t i o n And Stock-h o l d e r s ' investments: I f competitors are f u r n i s h e d w i t h v a l u a b l e i n f o r m a t i o n r e g a r d i n g p r o f i t o p p o r t u n i t i e s , which undoubtedly they would e x p l o i t , given the p r o f i t motive of a l l business e n t e r p r i s e s , the p r o f i t p o s i t i o n of the 89 r e p o r t i n g company might be impaired. T h i s i s a reasonable fear by management because, assuming that the market demand f o r a product remains the same, the entry of new competi-t o r s and/or the i n t e n s i f i c a t i o n of e f f o r t s by e x i s t i n g com-p e t i t o r s might d i v e r t part of that demand away from the product of the d i s c l o s i n g company, r e s u l t i n g i n d i m i n u t i o n of p r o f i t s f o r the l a t t e r . The adverse impact of reduced p r o f i t s on the s t o c k h o l d e r s would a l s o be e v i d e n t , namely: (a) dividends might have to be c u r t a i l e d or d e f e r r e d , .(b) there might be a lower market value f o r t h e i r company's stock. Hence, i t appears t h a t , i n t h i s case, "the i n t e r e s t s of the stock-holders might best be served by w i t h h o l d i n g f i n a n c i a l i n f o r m a t i o n . " (5) In other words, i f d i s c l o s u r e of any i n f o r m a t i o n would r e s u l t i n the r e p o r t i n g company h u r t i n g i t s c o m p e t i t i v e p o s i t i o n and, consequently, f a i l i n g to maximizes p r o f i t s f o r i t s s t o c k h o l d e r s , i t would seem that n o n - d i s c l o s u r e or d i s c l o s u r e only i n aggregative form at the most might be j u s t i f i e d . E m p i r i c a l Support For Some Information Secrecy: E m p i r i c a l support f o r the above may be quoted from a recent survey conducted to a s c e r t a i n the r e a c t i o n s of corporate e x e c u t i v e s to f u l l d i s c l o s u r e , and the part played by secrecy i n meeting business c o m p e t i t i o n (6) . The f i n d i n g s r e v e a l e d t h a t : 90 (a) corporate e x e c u t i v e s have no o b j e c t i o n to d i s c l o s u r e i n aggregative form of such i n -formation as g o a l s , o b j e c t i v e s and p o l i c i e s , f u t u r e e x p e c t a t i o n s , and the c u r r e n t econo-mic p o s i t i o n of t h e i r e n t e r p r i s e s , but they are s t r o n g l y opposed to such i n f o r m a t i o n being d i v u l g e d i n s p e c i f i c , d e t a i l e d or d i s -aggregative form, (b) secrecy of c e r t a i n i n f o r m a t i o n i s necessary fo r a business e n t e r p r i s e to maintain i t s competitiveness v i s - a - v i s i t s r i v a l s . I n d u s t r y - l i n e R eporting By Conglomerates Less  L i k e l y To Be A Competitive R i s k ; As d i s c l o s u r e on an aggre-g a t i v e b a s i s i s not l i k e l y to a f f e c t the competitiveness of a company, so i n some q u a r t e r s , the o p i n i o n i s held that conglomerate r e p o r t i n g ought to be " l i m i t e d to i n d u s t r y l i n e s and not extended to the more d e t a i l e d product l i n e s . " ( 7 ) I t i s i m p l i e d here, of course, that d i s c l o s u r e by i n d u s t r y i s s t i l l i n aggregative form, a not unreasonable assumption when compared to d i s c l o s u r e by products. By way of i l l u s t r a t i o n , O l i n Mathieson Chemical C o r p o r a t i o n r e p o r t e d , i n d o l l a r s and i n percentages of t o t a l income, the revenues and net a f t e r - t a x income of each of i t s d i f f e r e n t i n d u s t r i e s , as f o l l o w s ( S ) : Revenues ($ i n m i l l i o n s ) 1966 or 1*1 i I, I  i * _____ /o Chemicals 282 .4 25 . 3 250 .4 26 .7 Metals 2 37 .9 21 . 3 181 .4 19 . 3 Winchester, Western 167 . 9 15 .0 118 .9 12 .7 Forest Products, Fine Paper and F i l m :j ,182 .4 16 .3 161 .9 17 . 3 Squibb 246 .5 22 .1 225 .7 24 .0 T o t a l ©1,117 .1 100 .0 $938 . 3 100 .0 Net A f t e r - t a x Income C o n t r i b u t i o n Chemicals 20% Metals 18 Winchester, Western 17 Forest Products, F i n e Paper and F i l m 21 Squibb 24 I t can be observed that competitors may s t i l l "not know any more about O l i n ' s cost of the v a r i o u s Amino-Phas grades of mixed f e r t i l i z e r s ( c h e m i c a l s ) , or of O l i n brass s t r i p ( m e t a l s ) , or about the C e n t e n n i a l '66 r i f l e (Winchester-Western), or the Marksman 500 can (Forest Pro-ducts, Paper and F i l m ) , or about a b o t t l e of Sweeta (Squibb), than they d i d before." (9) The c o m p e t i t i v e p o s i t i o n of the company i s not impaired as would be l i k e l y i f more 92 d e t a i l e d d i s c l o s u r e i s d e s i r e d . In other words, " r e p o r t i n g by i n d u s t r y e l i m i n a t e s most i f not a l l f e a r s about r e v e a l -i n g s t r a t e g i c product i n f o r m a t i o n . " (10) I f there must have to be d i s c l o s u r e , t h e r e f o r e , i t would seem that aggregative d i s c l o s u r e i s what corpo-r a t e management would be prepared to v o l u n t e e r , as t h i s i s l e s s l i k e l y to expose the d i s c l o s i n g c o r p o r a t i o n to compe-t i t i v e r i s k s . Given the c h o i c e , o b v i o u s l y corporate manage-ment would p r e f e r not to d i s c l o s e any s t r a t e g i c i n f o r m a t i o n at a l l , even i n aggregative form, s i n c e i t always regards such i n f o r m a t i o n as p r o p r i e t a r y or as "trade secrets'*. Need For Evidence Of A n t i c i p a t e d I n j u r y To Compe-t i t i v e P o s i t i o n : Although there may be a p o s s i b i l i t y of i n j u r y to the c o m p e t i t i v e p o s i t i o n of a r e p o r t i n g company by t o o - d e t a i l e d or d i s a g g r e g a t i v e d i s c l o s u r e , i t i s , how-ever, held by some that " f e a r as to p o s s i b l e f u t u r e harm i s not to be regarded as s u f f i c i e n t to j u s t i f y the w i t h h o l d -in g of accounting i n f o r m a t i o n . " ( I I ) I t i s imperative that management must f i r s t of a l l s u b s t a n t i a t e that m a t e r i a l damage i s l i k e l y to occur (12). That there must be r e l i a b l e evidence of a n t i c i -pated i n j u r y to j u s t i f y suppression of i n f o r m a t i o n i s a l s o observed i n the f o l l o w i n g pronouncement by the S e c u r i t i e s and Exchange Commission i n the United S t a t e s (13): 93 I t i s patent, of course, that t a n g i b l e proof of the i n j u r y feared i s not r e q u i r e d i n t h i s type of pro-ceeding. At the same time, however, i t i s necessary that the r e g i s t r a n t e s t a b l i s h e s by proof the f a c t u a l b a s i s from which an i n f e r e n c e of f u t u r e harm can reasonably be drawn. A statement of the a s s e r t i o n s - a r i d v f e a r s of the management i n the absence of a showing that a reasonable b a s i s e x i s t s i s not s u f f i c i e n t . Summary: In summing up, f u l l d i s c l o s u r e , i f i t i n c l u d e s the divulgence of s t r a t e g i c or p r o p r i e t a r y i n f o r -mation, would seem to be c o m p e t i t i v e l y damaging to a d i s -c l o s i n g e n t e r p r i s e . Hence, i t may be d e s i r a b l e to main-t a i n some i n f o r m a t i o n secrecy. But before suppressing any u s e f u l i n f o r m a t i o n , corporate management would have to f i r s t of a l l s a t i s f y that such i n f o r m a t i o n would d e f i n i t e -l y c o n s t i t u t e a c o m p e t i t i v e r i s k i f made p u b l i c . DISINCENTIVE EFFBCT ON INNOVATION AND RISK-TAKING The importance of i n n o v a t i o n as a c o n t r i b u t o r to i n c r e a s e d p r o d u c t i v i t y and economic growth i n the f r e e p r i v a t e - e n t e r p r i s e economy can h a r d l y be o v e r - s t r e s s e d . By i n n o v a t i o n i s meant "an economic act by which a new product or a new s e r v i c e or a new production or merchan-d i s i n g method i s introduced to a c t u a l use." (14) I t i s apparent that a d e c i s i o n to innovate must be based on the e x p e c t a t i o n that t h i s would lead to greater e f f i c i e n c y 94 (that i s , r e d u c t i o n i n c o s t s ) and thus, would r a i s e the l e v e l of p r o f i t s f o r a c o r p o r a t i o n and i t s owners. With improved e f f i c i e n c y , a l i k e l y i n c r e a s e i n p r o d u c t i v i t y would a l s o be expected. C o n s i d e r i n g the economic environment of p r i v a t e -e n t e r p r i s e where production and marketing d e c i s i o n s are made by a m u l t i t u d e of i n d i v i d u a l c o r p o r a t i o n s , e f f i c i e n -cy and p r o d u c t i v i t y must i n e v i t a b l y be the preoccupation of management. In f a c t , " r i v a l r y between c o r p o r a t i o n s centres on management teams that compete w i t h one another to f i n d ways of c u t t i n g c o s t s , i n c r e a s i n g volume, modify-i n g o l d products and i n t r o d u c i n g new ones." ( 1 5 ) C l e a r l y , then, i n n o v a t i o n i s e s s e n t i a l to a c h i e v i n g e f f i c i e n c y and higher p r o d u c t i v i t y i n a c o r p o r a t i o n , and to m a i n t a i n i n g the c o r p o r a t i o n ' s competitiveness v i s - a - v i s i t s r i v a l s . Innovation may a r i s e from advances achieved i n r e s e a r c h and development w i t h i n an i n d i v i d u a l c o r p o r a t i o n . The a c t i v i t i e s which give r i s e to i n n o v a t i o n r e q u i r e forward planning and a commitment of l a r g e amounts of r e s o u r c e s . The r e s u l t s of such developmental e f f o r t s may be apparent only i n the long run; u s u a l l y , these are not r e a l i s e d u n t i l much o u t l a y has been i n c u r r e d on r e s e a r c h . JThose c o r p o r a t i o n s which are s u c c e s s f u l i n a c h i e v i n g i n n o v a t i o n and hence, greater e f f i c i e n c y and higher p r o d u c t i v i t y , are rewarded w i t h i n c r e a s e d p r o f i t s . But not a l l such 95 a c t i v i t i e s r e s u l t i n s u c c e s s f u l i n n o v a t i o n . Thus, i m p l i c i t l y , an i n n o v a t i n g c o r p o r a t i o n i s always the one which i s prepared to bear any r i s k of l o s s r e s u l t i n g from u n s u c c e s s f u l i n n o v a t i o n . C l e a r l y , because an i n n o v a t i n g c o r p o r a t i o n must i n c u r l a r g e investments i n resources for the pur-pose of i n n o v a t i o n and a l s o must face the r i s k that i t s e f f o r t s may not be s u c c e s s f u l , i t would be s t r o n g l y opposed to d i v u l g i n g any i n f o r m a t i o n as, f o r example, the r e s u l t s of i t s own researc h and product development, marketing s t r a t e g i e s , and other s t r a t e g i c i n f o r m a t i o n generated w i t h i n the c o r p o r a t i o n which would give i t an advantage over competitors. Such i n f o r m a t i o n , i f d i v u l g e d , would s u r e l y be exposed f o r the b e n e f i t of competitors at i t s expense. Hence, i t would seem that f u l l corporate d i s -c l o s u r e might have d i s i n c e n t i v e e f f e c t s on c o r p o r a t i o n s to innovate and to take r i s k s . An e m p i r i c a l study a l s o concluded that ( 1 6 ) : F u l l d i s c l o s u r e of i n f o r m a t i o n by business e n t e r p r i s e s i s not compatible w i t h the co m p e t i t i v e f r e e p r i v a t e - e n t e r -p r i s i n g economy. According to them, i f there was f u l l d i s c l o s u r e of a l l the r e l e v a n t and m a t e r i a l i n f o r m a t i o n about the competing e n t e r p r i s e s , then one "best" way of marketing, p r o d u c t i o n , f i n a n c i n g , e t c . , would probably develop and the e n t r e p r e n e u r i a l s p i r i t of f r e e p r i v a t e e n t e r p r i s i n g would probably be smothered because the i n c e n t i v e to innovate i n the hope f o r greater 96 p r o f i t s would be l o s t . F u l l d i s -c l o s u r e of i n f o r m a t i o n might thus e l i m i n a t e whatever b e n e f i t s have accrued or are expected to a r i s e from the c o m p e t i t i v e system of the f r e e - e n t e r p r i s e economy. In a h i g h l y c o m p e t i t i v e economy, management a l s o needs the utmost f l e x i b i l i t y to decide what should be the best long-term i n t e r e s t s of s t o c k h o l d e r s . For t h i s reason, management i s f e a r f u l that f u l l d i s c l o s u r e might lead s t o c k h o l d e r s to emphasize short-run p r o f i t s , and so might s u b j e c t management to undue c r i t i c i s m i f t h i s o b j e c t i v e i s not met. Continuing t h i s argument, "management might be r e l u c t a n t to undertake r e l a t i v e l y h i g h - r i s k p r o j e c t s or p r o j e c t s w i t h high long-term p r o f i t p o t e n t i a l but p o s s i b l e short-term l o s s e s . " (17) The p o s s i b l e consequences of such an a t t i t u d e are s e r i o u s . Long-term bene-f i t to s t o c k h o l d e r s would be s a c r i f i c e d f o r c u r r e n t p r o f i t a b i l i t y Any r e d u c -t i o n i n the r i s k - t a k i n g p r p p e n s i t y of c o r -porate management would i n e v i t a b l y work again s t the n a t i o n a l economic growth objec-t i v e s . (18) F u l l d i s c l o s u r e , t h e r e f o r e , might be opposed on the grounds that i t might discourage i n n o v a t i o n and the p r o p e n s i t y to take r i s k s by c o r p o r a t i o n s f o r , when t h i s happens, p r o d u c t i v i t y and economic growth would be adversely a f f e c t e d , thus r e s u l t i n g i n a s o c i a l l o s s to s o c i e t y . 97 RISKS OF MISINTERPRETATION ARISING FROM EXTENSIVE DISCLOSURE Areas Of P o s s i b l e Misunderstanding: C l e a r l y , the o b j e c t i v e of d i s a g g r e g a t i v e d i s c l o s u r e should be to enhance the value of accounting i n f o r m a t i o n to enable b e t t e r d e c i s i o n s to be made based upon i t . However, i t should be recognised that i t i s no easy task to d i s c l o s e , i n s u b s t a n t i a l d e t a i l , corporate i n f o r m a t i o n , w i t h o u t , at the same time, being s u b j e c t to the r i s k that such d e t a i l e d d i s c l o s u r e might not be meaningful and, indeed, could be mis l e a d i n g to users. A reason f o r t h i s i s that there are s t i l l , at present, areas of accounting where complete o b j e c t i v i t y i n the treatment of accounting data has not been, and may probably never be, e s t a b l i s h e d . In such i n s t a n c e s , the preparer of the corporate r e p o r t may have to r e l y , at best, upon s u b j e c t i v e judgement and hence, unless the judgemental bas i s i s c l e a r l y understood by the i n f o r m a t i o n users, they might w e l l draw t o t a l l y erroneous c o n c l u s i o n s from the accounting i n f o r m a t i o n . The f o l l o w i n g are i l l u s t r a t i v e of how p o s s i b l e m i s i n t e r p r e t a t i o n s may a r i s e i f there i s to be di s a g g r e -g a t i v e d i s c l o s u r e ; these examples would have p a r t i c u l a r r e f e r e n c e to segmental or p r o d u c t - l i n e r e p o r t i n g by con-glomerate c o r p o r a t i o n s 3 : a This i s not to suggest that the r i s k s of mis-98 (a) A l l o c a t i o n Of Common Costs: In any conglo-merate e n t e r p r i s e , as i s a l s o t r u e of any mul t i - p r o d u c t company w i t h i n each i n d u s t r y , c e r t a i n common costs or j o i n t c o s t s may be i n c u r r e d , but the b e n e f i t s of which accrue to the business as a whole and not to a s p e c i f i c product or a segment of the business o r g a n i s a t i o n . Examples of the more s i g n i f i c a n t common c o s t s are: ( i ) general and a d m i n i s t r a t i v e expenses, ( i i ) r e s e a r c h and develop-ment c o s t s , ( H i ) f i n a n c i n g c o s t s , f o r example, i n t e r e s t , ( i v ) i n s t i t u t i o n a l a d v e r t i s i n g , and (v) f e d e r a l and other income-taxes. C l e a r l y , i f the above cost s are not t r a c e a b l e d i r e c t l y to a s p e c i f i c product or a business segment, then s u r e l y to d i s c l o s e any i n f o r m a t i o n on a p r o d u c t - l i n e or segmental b a s i s would n e c e s s i t a t e an a l l o c a t i o n of these common co s t s to the v a r i o u s products or segments, and t h i s i s , at best, a r b i t r a r y , depending upon management's judgement of the r e l a t i v e importance of the d i f f e r e n t p r o d u c t - l i n e s or segments, as w e l l as v a r i o u s other f a c t o r s . understanding are only in h e r e n t i n expanded conglomerate r e p o r t i n g . M i s l e a d i n g i n t e r p r e t a t i o n s may a l s o be l i k e l y i n non-conglomerate c o r p o r a t i o n s , t h a t i s , i n companies op e r a t i n g w i t h i n an i n d u s t r y or u n i t a r y companies having only one p r o d u c t - l i n e , i f t o o - d e t a i l e d d i s c l o s u r e i s , d e s i r e d . On the other hand, i t would appear that the r i s k s would be more apparent wi t h regard to disaggrega-t i v e conglomerate d i s c l o s u r e as compared to the other cases. 99 I t f o l l o w s that unawareness of the a r b i t r a r y a l l o c a t i o n s of co s t s among products or segments could r e s u l t i n very m i s l e a d i n g c o n c l u s i o n s by i n f o r m a t i o n users about the r e l a t i v e p r o f i t a b i l i t y of the v a r i o u s products or segments. Moreover, d i s c l o s i n g , as w e l l , of the ba s i s upon which these common costs are a l l o c a t e d may i n v o l v e so much explanatory m a t e r i a l which may i t s e l f be a source of c o n f u s i o n , and besides, i t would most l i k e l y d e t r a c t from the usefulness of the corporate r e p o r t , s i n c e i t may obscure the e s s e n t i a l data t h e r e i n . T h i s i s c l e a r l y pointed out by the United States S e c u r i t i e s and Exchange Commission, as f o l l o w s ( £ 9 ) : Nor was the usefulness of the statements increased by.the f a c t that pages and pages of footnotes to the statements and comments i n the a u d i t o r s ' r e p o r t s sought to e x p l a i n the r e s u l t s of the i d i o s y n c r a s i e s , a n d g y r a t i o n s of . p r a c t i c e v.Thich went i n t o the making of the statements. Indeed, the m u l t i -tude of footnotes and ex p l a n a t i o n s were i n themselves sources of c o n f u s i o n . Therefore, the more common co s t s there are that have to be a l l o c a t e d , and i f these c o s t s are s i g n i f i c a n t , as w e l l , i n terms of t h e i r e f f e c t on net income, the greater i s the r i s k t h a t t o o - d e t a i l e d d i s c l o s u r e might r e s u l t i n misl e a d i n g i n t e r p r e t a t i o n s by users. (b) T r a n s f e r P r i c i n g : This a r i s e s from i n t r a -company t r a n s f e r s of m a t e r i a l s and s e r v i c e s . Thus, a d i v i -100 s i o n of a company may produce a product which i s not only s o l d to an ou t s i d e market, but i s a l s o t r a n s f e r r e d to another d i v i s i o n of the company f o r use as a raw m a t e r i a l In the case of the intra-company transfer.,, the problem, t h e r e f o r e , i s how to determine i t s t r a n s a c t i o n p r i c e . I t i s not d i f f i c u l t to see that the t r a n s f e r p r i c e used w i l l have an i n f l u e n c e on the r e l a t i v e p r o f i t a b i l i t y between the t r a n s f e r o r d i v i s i o n and the t r a n s f e r e e d i v i s i o n , w i t h consequent misl e a d i n g i n t e r p r e t a t i o n s by o u t s i d e p a r t i e s . I t i s tempting to suggest that t r a n s f e r p r i c e s should r e f l e c t the o p p o r t u n i t y c o s t s which, i n e f f e c t , means that they ought to be based on open market p r i c e s , but t h i s i s not always p o s s i b l e , f o r "there are a great number of intra-company t r a n s f e r s f o r which no r e a d i l y a v a i l a b l e open market t r a n s a c t i o n e x i s t s as a standard agai n s t which to measure the p r i c e used." (20) Solomons and Mautz, on the other hand, are i n favour of p r i c i n g i n t e r - d i v i s i o n a l s a l e s on the basi s of cos t (21). But s t i l l , t h i s does not e l i m i n a t e the p o s s i -b i l i t y that m i s l e a d i n g i n f e r e n c e s may be drawn reg a r d i n g the r e l a t i v e p r o f i t a b i l i t y between d i v i s i o n s . T h u s , according to Chetkovich ( 2 2 ) , the a l t e r n a t i v e to i n t e r -d i v i s i o n a l s a l e i s s a l e on the open market. This means that the t r a n s f e r o r d i v i s i o n ' s " p r o f i t a b i l i t y " w i l l be adve r s e l y a f f e c t e d s i n c e i t s product i s p r i c e d at c o s t , 101 w h i l e the t r a n s f e r e e d i v i s i o n w i l l b e n e f i t i n the process. "Management i s i n a p o s i t i o n to recognise t h i s p o s s i b l e i n e q u i t y and may, f o r i t s purposes, use some other method of t r a n s f e r p r i c i n g to b e t t e r measure the r e l a t i v e p e r f o r -mances of the two d i v i s i o n s . However, the i n v e s t o r probab-l y w i l l not be able to make a s i m i l a r d i s t i n c t i o n . " (23) C u r r e n t l y , management i s using v a r i o u s p r i c i n g techniques f o r intra-company t r a n s a c t i o n s , f r e q u e n t l y even w i t h i n the same company (24). Hence, i t would seem d e s i r a -ble to d i s c l o s e the p r i c i n g bases as w e l l , but, as i n the d i s c l o s u r e of cost a l l o c a t i o n methods, t h i s might be f u r t h e r confusing to the average statement user. (c) Rate Of Return On Investment S t a t i s t i c .: The suggestion has a l s o been made that i t i s incomplete to show only a breakdown of the income statement, i f product-l i n e or segmental d i s c l o s u r e i s to be meaningful, and that i t may be m i s l e a d i n g unless there i s a d d i t i o n a l d i s c l o s u r e showing the r a t e of r e t u r n on investment f o r the v a r i o u s product l i n e s or segments (25). Thus, Rappaport c i t e s the f o l l o w i n g example (26): For example, s t o c k h o l d e r s could s i g n i f i c a n t l y m i s i n t e r p r e t a r e p o r t that a product l i n e c o n t r i b u t e d 50 per cent of the s a l e s but made only 5 per cent of the net p r o f i t i f the r e p o r t d i d not a l s o inform- them that the i n v e s t -ment i n that product l i n e was very s m a l l r e l a t i v e l y and that the i n v e n t o r y turned over weekly or perhaps even d a i l y . 102 In other words, expanded d i s c l o s u r e should i n c l u d e , as w e l l , a segmented balance sheet, but o b v i o u s l y t h i s i s no easy ta s k , f o r i t i s d i f f i c u l t to e s t a b l i s h r a t i o n a l bases by which to a l l o c a t e assets and l i a b i l i t i e s to the d i f f e r e n t segments. The r e s u l t s could w e l l be mis-l e a d i n g and might a l s o be e a s i l y m i s i n t e r p r e t e d by users. I t has a l s o been pointed out that "there i s con-s i d e r a b l e debate over the r e l a t i v e v a l i d i t y of the v a r i o u s means of computing the r a t e of r e t u r n f o r the t o t a l e n t i t y , l e t alone i t s segments and the p u b l i c a t i o n s of such i n f o r m a t i o n , even w i t h explanatory d i s c l o s u r e , could be more mislea d i n g than i n f o r m a t i v e . " (27) (d) D i s c l o s u r e Of Future Plans And E x p e c t a t i o n s : Not unexpectedly, an extension of corporate d i s c l o s u r e should i n c l u d e i n f o r m a t i o n regarding the f u t u r e plans and expec t a t i o n s of management. I t s relevance to meeting the needs of e s p e c i a l l y i n v e s t o r s has been pointed out i n chapter two. Although i t i s d i f f i c u l t to dispute i t s relevance to i n v e s t o r decision-making, management i s , n e v e r t h e l e s s , opposed to d i s c l o s u r e of f u t u r e plans and ex p e c t a t i o n s because, among other reasons, they are not r e l i a b l e . The r e l i a b i l i t y of such data i s questionable on two grounds. In the f i r s t p l a c e , i t i s contended that the f u t u r e i s s p e c u l a t i v e , i s fraught w i t h u n c e r t a i n t i e s , and 103 i n v o l v e s too many v a r i a b l e s f o r c o n s i d e r a t i o n . Hence, any e x t r a p o l a t i o n of accounting i n f o r m a t i o n i n t o the f u t u r e , even by a p p l y i n g the most s o p h i s t i c a t e d f o r e c a s t -i n g technique, would be at best, estimates. While manage-ment i s aware of the l i m i t a t i o n s and a c c o r d i n g l y , uses such i n f o r m a t i o n w i t h c i r c u m s p e c t i o n , users' understanding, on the other hand, of the many estimates i n v o l v e d i n bud-gets and f o r e c a s t s i s l i m i t e d ; consequently, they might regard these f i g u r e s as being absolute and hence, would be e a s i l y m i s l e d . In the second p l a c e , "accountants g e n e r a l l y r e f r a i n from r e p o r t i n g budgets r e l a t i n g to f u t u r e periods to e x t e r n a l users on the ground that the i n f o r m a t i o n i s not s u f f i c i e n t l y v e r i f i a b l e , although i t might be h i g h l y r e l e v a n t to e x t e r n a l users' needs." ( 2 8 ) E f f e c t On Resource A l l o c a t i o n : I t appears that extended i n f o r m a t i o n d i s c l o s u r e can cut both ways i n r e s -pect of e f f e c t i v e a l l o c a t i o n of resources. The point was made i n chapter two t h a t , by a d d i t i o n a l corporate d i s c l o -sure, i n v e s t o r s are enabled to make b e t t e r d e c i s i o n s , r e s u l t i n g i n a more e f f i c i e n t a l l o c a t i o n of t h e i r c a p i t a l r e s o u rces. On the other hand, as can be observed i n the foregoing d i s c u s s i o n , management a s s e r t s that expanded d i s c l o s u r e would r e q u i r e the making of e s t i m a t e s , assump-104 t i o n s , and a r b i t r a r y a l l o c a t i o n s and, as a consequence, might r e s u l t i n mi s l e a d i n g a user or confusing him with excessive d e t a i l . I f investment d e c i s i o n s are made on the b a s i s of improper i n t e r p r e t a t i o n and e v a l u a t i o n of expanded i n f o r m a t i o n , c l e a r l y resources would not be a l l o -cated according to t h e i r most e f f e c t i v e uses. This mis-investment of c a p i t a l resources would then represent a s o c i a l l o s s to s o c i e t y . Hence, i t would seem that the point should a l s o be noted that t o o - d e t a i l e d d i s c l o s u r e of corporate i n f o r -mation might be d e t r i m e n t a l not only to the c o r p o r a t i o n i t s e l f but to the whole economy as w e l l , i f t h i s r e s u l t s i n m i s - a l l o c a t i o n of the nati o n ' s c a p i t a l resources. Legal L i a b i l i t y : I f management i s u l t i m a t e l y held r e s p o n s i b l e f o r ensuring that the f i n a n c i a l s t a t e -ments x-jhich i t p u b l i s h e s , are r e l i a b l e and comprehensible, i t seems l o g i c a l that management should express concern about any ext e n s i v e d i s c l o s u r e which, because of s e r i o u s a l l o c a t i o n problems, might reduce the r e l i a b i l i t y and u n d e r s t a n d a b i l i t y of the corporate i n f o r m a t i o n , and th e r e -b D a i l y , however, hypothesised that i t might be p o s s i b l e to r e p o r t f o r e c a s t e d i n f o r m a t i o n . For a d i s c u s -s i o n of the technique he employs, see R. Au s t i n D a i l y , "The F e a s i b i l i t y Of Reporting Forecasted Information," Accounting Review, October, 1971, pp. 686-692. 105 by, exposes the management to unnecessary l e g a l r i s k s , and p o s s i b l e f u t u r e c o s t s . The r i s k of l e g a l a c t i o n against management may a l s o a r i s e i n other ways. For example, d e t a i l e d d i s c l o -sure of research and development c o s t s , i f they do not generate any p r o f i t a b l e r e t u r n s , could very w e l l i n v i t e s t o c k h o l d e r s u i t s f o r mismanagement (29). I t i s a l s o suggested that the d e t a i l e d i n f o r m a t i o n d i s c l o s e d may have c o m p e t i t i v e value and consequently, " s t o c k h o l d e r s may be able to hold r e s p o n s i b l e the executives of the d i s -c l o s i n g c o r p o r a t i o n f o r any damage to t h e i r i n t e r e s t s . " (30) I t would seem t h a t , i f a d d i t i o n a l i n f o r m a t i o n may be m i s l e a d i n g and i f management must be safeguarded against the p o s s i b i l i t y of l i t i g a t i o n (and r e s u l t i n g c o s t s ) , d e t a i l e d d i s c l o s u r e w i l l have to be "enshrouded i n q u a l i -f i c a t i o n s , d e f i n i t i o n s and caveats" (31); c l e a r l y , compre-h e n s i b i l i t y i s not improved as a r e s u l t . R e action From Customers: Apart from being a f f e c t -ed by cost a l l o c a t i o n s and a r b i t r a r y t r a n s f e r p r i c e s , the r e l a t i v e p r o f i t a b i l i t y of the v a r i o u s products of a corpo-r a t i o n may a l s o be a t t r i b u t a b l e to such f a c t o r s as competi-t i v e environment, c a p i t a l investment, research and product development expenditures, as w e l l as other f a c t o r s . Unless t h i s i s c l e a r l y understood, customers might w e l l draw mis-l e a d i n g c o n c l u s i o n s about the l e v e l of p r o f i t earned by a 106 given product. As Mautz observed, the p r o f i t s d e r i v e d f o r a given product may not be a f a i r i n d i c a t i o n of a c t u a l p r o f i t s (32). He c i t e s the example t h a t , "past research and development cos t s of s u b s t a n t i a l amounts may have already been w r i t t e n o f f , thus the company's reported earn-ings on a product may not be a f a i r r e f l e c t i o n of i t s a c t u a l long-range p r o f i t s . " (33) A customer who i s unaware of the aforementioned f a c t o r s , t h e r e f o r e , might be misled i n t o t h i n k i n g that the company i s over-charging and i s making monopoly p r o f i t s , and a c c o r d i n g l y , might pressure f o r a r e d u c t i o n i n product p r i c e , to the detriment of the i n t e r e s t s of the company. Reactions From Other I n t e r e s t e d P a r t i e s : As w e l l as the above p o s s i b l e adverse impact on the r e p o r t i n g com-pany, p o s s i b l e unfavourable r e a c t i o n s may a l s o be met from government a n t i - t r u s t agencies, labour o r g a n i s a t i o n s , tax a u t h o r i t i e s , and even from the company's own s t o c k h o l d e r s . Thus, from an a n t i - t r u s t point of view, a company may be g u i l t y of the u n f a i r p r a c t i c e of c r o s s - s u b s i d i z a t i o n , t h a t i s to say, the p r o f i t s of one segment may be used to s u b s i d i z e e f f o r t s i n another segment which operates i n a more c o m p e t i t i v e environment (34). Although such a p o s s i -b i l i t y cannot be discounted, i t should a l s o be recognised 107 that segmental p r o f i t s may not r e f l e c t the true p r o f i t a b i -l i t y because, as pointed out, a r b i t r a r y a l l o c a t i o n s of c o s t s , e t c . , may be necessary. S i m i l a r l y , the d i f f i c u l t y of an o b j e c t i v e d e t e r -mination of segmental p r o f i t a b i l i t y may not be f u l l y understood and consequently, employees through t h e i r labour o r g a n i s a t i o n s may press f o r improved wages, which could add to the f u t u r e production c o s t s of the d i s c l o s i n g company; tax a u t h o r i t i e s may harass the company w i t h q u e r i e s ; and the company's s t o c k h o l d e r s may pressure f o r higher d i v i d e n d payments. C o n s i d e r i n g the growing trend toward a greater use of i n t e r n a l f i n a n c i n g by companies, i t i s c l e a r that a higher d i v i d e n d d i s t r i b u t i o n may not always be i n the long-range i n t e r e s t of e i t h e r the company or i t s st o c k h o l d e r s because a d d i t i o n a l c a p i t a l resources are needed f o r f u r t h e r research and f u t u r e expansions. ACTUAL COST OF DATA COLLECTION, CLASSIFICATION, AND PRESEN-TATION No-one can deny t h a t , i f d i s c l o s u r e i s to be u s e f u l , raw data must f i r s t be c o l l e c t e d and organised i n a meaningful form; hence, a monetary cost w i l l have to be i n c u r r e d i n the process. I t f o l l o w s , t h e r e f o r e , that the more d e t a i l s are r e q u i r e d f o r d i s c l o s u r e , the more w i l l probably be the cost of supp l y i n g the a d d i t i o n a l data. 108 New re c o r d s , r e p o r t s , and a d d i t i o n a l personnel may be necessary; p o s s i b l y , the cost may a l s o i n c l u d e an a d d i -t i o n a l a u d i t fee (35). The po i n t was made, however, that i n f a c t not much a d d i t i o n a l cost i s i n c u r r e d because a good dea l of d e t a i l e d i n f o r m a t i o n i s being accumulated by management anyway f o r i n t e r n a l use. In a sense, t h i s may be true but, from the viewpoint of management, a d i s t i n c t i o n must be made between i n f o r m a t i o n that i s intended f o r manage-r i a l purposes and i n f o r m a t i o n that i s d i s c l o s e d to e x t e r -n a l users. A c c o r d i n g l y , the f o l l o w i n g arguments can be adduced as r e b u t t a l : (a) Data that are prepared f o r managerial use do not expose management to l e g a l r i s k s as published data do. (b) In using such i n t e r n a l data, management i s aware of i t s l i m i t a t i o n s . (c) By s t a t i n g that i n t e r n a l data can be put to e x t e r n a l use, an i m p l i c i t assumption i s made that a d d i t i o n a l d i s c l o s u r e would " f o l l o w as c l o s e l y as p o s s i b l e the needs of corporate management f o r i n t e r n a l i n f o r m a t i o n systems." (36). In t h i s way, a minimum of r e c l a s s i f i -c a t i o n may be r e q u i r e d and hence, a d d i t i o n a l d i s c l o s u r e w i l l not e n t a i l c o n s i d e r a b l e e x t r a cost of p r e p a r a t i o n . 109 But, as Chetkovich comments, "the presumption that i n f o r m a t i o n most u s e f u l to management i s best l i k e l y to serve the i n v e s t o r r e q u i r e s c a r e f u l study. I t can be argued very cogently that the management o b j e c t i v e of best a l l o c a t i n g and managing the resources of a company r e q u i r e s i n f o r m a t i o n c o n s i d e r a b l y d i f f e r e n t i n cha r a c t e r from that r e q u i r e d by an i n v e s t o r f o r best a l l o c a t i n g and managing h i s investment resources." (37) C l e a r l y , i f t h i s i s the case, then r e o r g a n i -s a t i o n and p r e s e n t a t i o n of data which would meet e x t e r n a l user needs cannot be s a i d to i n v o l v e l i t t l e a d d i t i o n a l c o s t . However, i t would seem that t h i s cost argu-ment used by management as a defence against more complete d i s c l o s u r e , might l o s e i t s f o r c e when use of the computer to compile the necessary data f o r r e p o r t i n g purposes, become widespread. In t h i s connection, Commissioner Wheat a l s o notes the development of the " m i c r o f i c h e " , a s m a l l card c o n t a i n i n g photographic impressions of from 60 to a thou-sand or more p r i n t e d pages (38). Thus, according to Wheat, f i n a n c i a l i n f o r m a t i o n from corporate r e p o r t s could be c For an expanded d i s c u s s i o n of t h i s , see Robert K. Mautz, "Conglomerate. Reporting And Data R e l i a b i l i t y , " F i n a n c i a l E x e c u t i v e , September, 1967, pp. 25-35. no recorded on such Cards and made a v a i l a b l e promptly and i n e x p e n s i v e l y to those who need them. Apart from the a c t u a l a d d i t i o n a l cost of prepa-r a t i o n , corporate management a l s o emphasizes that much of the e x e c u t i v e s ' time may have to be spent i n respond-i n g to queries a r i s i n g from the a d d i t i o n a l d i s c l o s u r e (39). One may look upon t h i s as an i m p l i c i t cost to management f o r , otherwise, the time could have been u t i l i s e d i n planning f o r the company's f u t u r e . Summing up, generating a d d i t i o n a l i n f o r m a t i o n to meet the requirements f o r more d i s c l o s u r e can only be achieved through i n c u r r i n g a d d i t i o n a l c o s t s and t h i s "might, i n the context of c o s t - b e n e f i t a n a l y s i s , be d e t r i -mental to the s t o c k h o l d e r , " ( 4 0 ) and, of course, to manage-ment as w e l l . SUMMARY I t i s thus observed that a more ext e n s i v e d i s -c l o s u r e of corporate i n f o r m a t i o n i s not, however, without any p o s s i b l e 'cost' e f f e c t s : (a) Extensive d i s c l o s u r e may r e s u l t i n the d i v u l -gence of i n f o r m a t i o n which management deems to be i t s "trade s e c r e t s " , to the detriment of i t s company's competi-t i v e p o s i t i o n and hence, p r o f i t - m a k i n g c a p a b i l i t y . Stock-holders would a l s o s u f f e r reduced dividends and lower I l l market v a l u a t i o n s f o r t h e i r s e c u r i t i e s . (b) E xtensive d i s c l o s u r e may weaken management's i n c e n t i v e to innovate and to take r i s k s , both of which are necessary to achieve economic growth under the p r i v a t e -e n t e r p r i s e economic system, as w e l l as to f o s t e r competi-t i o n . The long-term w e l f a r e of st o c k h o l d e r s may a l s o be adversely a f f e c t e d . (c) E xtensive d i s c l o s u r e may not be meaningful s i n c e i t may r e q u i r e estimates, assumptions and a r b i t r a r y a l l o c a t i o n s , which, indeed, may be misle a d i n g unless i n t e r -preted by ex p e r t s ; "the reasonable man", "the average prudent i n v e s t o r " or "the reasonably informed reader" i s not l i k e l y to be one. There i s , t h e r e f o r e , a r i s k that there may be adverse e f f e c t s a r i s i n g from p o s s i b l e mis-l e a d i n g i n t e r p r e t a t i o n s by i n t e r e s t e d p a r t i e s . (d) E xtensive d i s c l o s u r e may e n t a i l a d d i t i o n a l c o s t s of p r e p a r a t i o n which may w e l l be c o n s i d e r a b l e , espe-c i a l l y when i t may be d e s i r a b l e to reorganise the data developed f o r managerial a p p l i c a t i o n s , to s u i t e x t e r n a l user needs. 112 Footnotes I Joseph B. Lanterman, "How To Resolve The F i n a n c i a l Reporting Controversy," F i n a n c i a l E x e c u t i v e , \ December ,, 1966 , p. 46. 2 Morton Backer and Walter B. MacFarland, E x t e r n a l  R e p o r t i n g For Segments Of A Business, N a t i o n a l A s s o c i a -t i o n of Accountants, 1968, p. 83. 3 I b i d . 4 Robert K. Mautz, F i n a n c i a l R e p orting By D i v e r -s i f i e d Companies, F i n a n c i a l Executives Research Founda-t i o n , New York, 1968, p. 150. 5 Charles T. Horngren, " D i s c l o s u r e : 1957", Accoun-t i n g Review, October, 1957, p. 603. 6 See Huang Hua C h a i , The Role Of Secrecy In  Meeting Business Competition, Unpublished Master T h e s i s , U n i v e r s i t y of B r i t i s h Columbia, 1969. 7 Martin Mellman, " P r o f i t a b i l i t y D i s c l o s u r e By 'Conglomerate' Companies," New York C e r t i f i e d P u b l i c  Accountant, August, 1967, pp. 595-602. 8 Thomas E. Lynch, " D i v e r s i f i e d R e p o r t i n g , " F i n a n c i a l A n a l y s t s J o u r n a l , November-December, 1968, p. 69. 9 Loc. c i t . 10 I b i d . , pp. 67-73. I I C . H . G r i f f i n and T.H.Williams, "Measuring Adequate D i s c l o s u r e , " J o u r n a l of Accountancy, A p r i l , I960, p. 46. 113 12 Morton Backer and Walter B. MacFarland, op. c i t . , p. 85 . 13 American Sumatra Tobacco C o r p o r a t i o n , 7 SEC  1052 (1940), as quoted by C . H . G r i f f i n and T.H.Williams, op. c i t . , p. 46. 14 This i s the meaning of i n n o v a t i o n as Joseph Schumpeter used the term. See Max Ways, " A n t i - t r u s t In An Era Of R a d i c a l Change," Fortune, March, 1966, p. 221. 15 I b i d . 16 Huang Hua C h a i , op. c i t . , p. 95. 17 This i s the view expressed by a corporate execu-t i v e i n a survey. Quoted by Robert K. Mautz, op. c i t . , p. 61. 18 Loc. c i t . 19 As s o c i a t e d Gas And E l e c t r i c a l Company, I I SEC 1026 (1942), as quoted by C . H . G r i f f i n and T.H.Williams, op. c i t . , pp. 44-45. 20 Robert K. Mautz, op. c i t • , p. 37. 21 See David Solomons, D i v i s i o n a l Performance And  C o n t r o l , F i n a n c i a l E x e cutives Research Foundation, 1965. See a l s o Robert K. Mautz, op. c i t . , pp. 37-38. 22 Michael K. Chetkovich, "Accounting Problems And Some Proposed S o l u t i o n s Comments," i n P u b l i c Report-ing By Conglomerates e d i t e d by A l f r e d Rappaport, Peter TT. "Firmin, and Stephen A. Z e f f , (Englewood C l i f f s , New Jersey: P r e n t i c e - H a l l , I nc., 1968), p. 108. 23 Loc . c i t . 24 Robert K. Mautz, op. c i t . , p. 36. 114 25 See, f o r example, A.A.Sommer, J r . , "Conglo-merate D i s c l o s u r e : F r i e n d Or Foe?" i n F i n a n c i a l Accoun-t i n g Theory I I , e d i t e d by Thomas P. K e l l e r and Stephen A. Z e f f , (New York: McGraw-Hill, 1969), p. 224; Louis H. Rappaport, "Problems In Product Line Reporting," Lybrand  J o u r n a l , V o l . 48, Nos. I & 2, 1967, p. 7; David Solomons, "Accounting Problems And Some Proposed S o l u t i o n s , " i n P u b l i c R e p o r t i n g By Conglomerates, op. c i t . , p. 102. 26 Louis H. Rappaport, op. c i t . , p. 7. 27 Michael N. Chetkovich, op. c i t . , p. 109. 28 American Accounting A s s o c i a t i o n , as quoted i n "Should The CPAs Opinion Be Extended To Include F o r e c a s t s ? " by John 3. Willingham, Charles H. Smith and Ma r t i n H. T a y l o r , F i n a n c i a l E x e c u t i v e , September, 1970, p. 88. 29 A.A.Sommer, op. c i t . , p. 223. 30 Robert K. Mautz, op. c i t . , p. 73. 31 A.A.Sommer, op. c i t . , p. 224. 32 Robert K. Mautz, op. c i t . , p. 70. 33 I b i d . 34 John M. B l a i r , " A n t i t r u s t I m p l i c a t i o n s Of Conglomerate Re p o r t i n g , " i n P u b l i c R e p o r t i n g By Conglomerates, op. c i t . , pp. 25-36. 35 Robert K. Mautz, op. c i t . , p. 73. 36 A l f r e d Rappaport, Peter A. F i r m i n , Stephen A. Z e f f , P u b l i c R e p orting By Conglomerates,(Englewood C l i f f s , New Jer s e y : P r e n t i c e - H a l l , I nc., 1968) p. 124. 37 Michael N. Chetkovich, op. c i t . , p. I07. x 38 E d i t o r ' s Notebook, J o u r n a l of Accountancy, September, 1968, pp. 33-34. 39 Robert K. Mautz, op. ^ c i t . , p. 74. 40 A l f r e d Rappaport, Peter A. F i r m i n , Stephen Z e f f , op. c i t . , p. 124. CHAPTER FIVE AN EVALUATION USING THE VALUE CONCEPT APPROACH In the d i s c u s s i o n s i n the preceding chapters, the viewpoints of the d i f f e r e n t p a r t i e s at i n t e r e s t i n the question of corporate d i s c l o s u r e were presented. In g e n e r a l , two d i a m e t r i c a l l y opposed p o i n t s of view could be noted. On the one hand, there appears to be a strong case f o r f u l l d i s c l o s u r e of corporate i n f o r m a t i o n c o n s i -dering the p o s s i b l e b e n e f i t s that such d i s c l o s u r e may accrue to the i n t e r e s t e d e x t e r n a l p a r t i e s . On the other hand, t a k i n g the standpoint of corporate management, f u l l d i s c l o s u r e i s opposed on the ground that i t operates to the detriment of the e n t e r p r i s e ; suppression of some i n f o r m a t i o n would seem to be d e s i r a b l e . Thus the technique of the value concept has been proposed i n t h i s study as a framework w i t h i n which the question of d i s c l o s u r e may be considered. , The e x p l a -n a t i o n of t h i s approach i s the subject-matter of the present chapter. Only the t h e o r e c t i c a l aspect of the approach w i l l be considered. 1 1 7 Before proceeding to do t h i s , however, i t i s d e s i r a b l e to rec o n s i d e r the concept of f u l l d i s c l o s u r e i n the l i g h t of the d i s c u s s i o n s of the d i f f e r e n t view-p o i n t s regarding d i s c l o s u r e . This i s necessary because the use of the value concept approach would r e q u i r e that f u l l d i s c l o s u r e i s f i r s t made c l e a r . AN OPERATIONAL MEANING QF FULL DISCLOSURE I t i s e v i d e n t , from the preceding chapters where the r e a c t i o n s of the d i f f e r e n t i n t e r e s t s were con-s i d e r e d , that the question of f u l l corporate d i s c l o s u r e has been v a r i o u s l y i n t e r p r e t e d . Thus, some e x t e r n a l i n t e r e s t s as, for example, some f i n a n c i a l a n a l y s t s , tend-ed to look upon f u l l d i s c l o s u r e i n a wider p e r s p e c t i v e . This means to say t h a t , i f there i s f u l l d i s c l o s u r e , then "there should be l i t t l e i n the way of r e s t r i c t i o n s upon the i n f o r m a t i o n a v a i l a b l e to them No one had a r i g h t to deny them the i n f o r m a t i o n which they f e l t they needed to perform t h e i r a n a l y t i c a l f u n c t i o n s s a t i s f a c t o r i l y . " ( I) S i m i l a r l y , there were those among the corporate management group who were s t r o n g l y opposed to f u l l d i s -c l o s u r e because, by i n t e r p r e t i n g f u l l d i s c l o s u r e i n the broadest sense, t h i s would r e s u l t in. i n j u r y to the compe-t i t i v e p o s i t i o n of t h e i r e n t e r p r i s e s . Mautz thus comments on t h i s d i f f e r e n c e i n i n t e r p r e t a t i o n of " a d d i t i o n a l d i s c l o -118 sure" among corporate e x e c u t i v e s , i n h i s e m p i r i c a l study r e g a r d i n g conglomerate r e p o r t i n g ( 2 ) : I t should be pointed out that i n responding to t h i s p a r t i c u l a r ques-t i o n (of co m p e t i t i v e disadvantage), companies were r e a c t i n g to an unknown contingency, that i s , they had no way of knowing at t h i s p o i n t what the " a d d i t i o n a l d i s c l o s u r e s " might be. Some o b v i o u s l y i n t e r p r e t e d these as i n v o l v i n g a s i g n i f i c a n t degree of d e t a i l e d product i n f o r m a t i o n and re-acted a c c o r d i n g l y . Others may have been much more moderate i n t h e i r expec-t a t i o n s and, t h e r e f o r e , much l e s s f e a r f u l of the consequences. P r o p r i e t a r y I nformation: In a review of the l i t e r a t u r e on d i s c l o s u r e , i t i s observed that v a r i o u s terms have been employed by d i f f e r e n t w r i t e r s to desc r i b e that category of i n f o r m a t i o n p e r t a i n i n g to a f i r m the d i s c l o s u r e of which would be c o m p e t i t i v e l y harmful and al s o would have an i n h i b i t i v e e f f e c t on i n n o v a t i o n . This type of i n f o r m a t i o n i s thus v a r i o u s l y described as " p r o p r i e -t a r y " i n f o r m a t i o n , " s e n s i t i v e " i n f o r m a t i o n , " s t r a t e g i c " i n f o r m a t i o n , " c o n f i d e n t i a l " i n f o r m a t i o n , " c o m p e t i t i v e " i n f o r m a t i o n , or simply, "trade s e c r e t s . " The d e f i n i t i o n of "trade s e c r e t s " i s given as f o l l o w s ( 3 ) : "Trade s e c r e t means and i n c l u d e s any c o n f i d e n t i a l t e c h n i c a l or other c o n f i -d e n t i a l business i n f o r m a t i o n , regard-l e s s of whether i t i s i n .written or other t a n g i b l e form, which i s not gene-r a l l y a v a i l a b l e to the p u b l i c , and which gives one who uses i t an advantage 119 over competitors who do not know or use i t . " C l e a r l y , t h i s i m p l i e s that such i n f o r m a t i o n must have been generated from w i t h i n the f i r m through i t s own research and other i n n o v a t i v e a c t i v i t i e s and, t h e r e f o r e , must be i n the nature of p r o p r i e t a r y s e c r e t s . The f o l l o w i n g l i s t shows the items of i n f o r m a t i o n which are g e n e r a l l y regarded as p r o p r i e t a r y or c o n f i d e n t i a l : C o n f i d e n t i a l T e c h n i c a l Information Formulas Production processes P a t t e r n s Engineering designs and s p e c i f i c a t i o n s Methods of a d m i n i s t r a t i v e o r g a n i s a t i o n Methods of q u a l i t y c o n t r o l C o n f i d e n t i a l Business Information Share of market Customer s a t i s f a c t i o n P r o d u c t i v i t y indexes Volume of s a l e s i n p h y s i c a l u n i t s Unit cost P r i c i n g p o l i c y and method a T h i s l i s t a l s o i n c o r p o r a t e s examples c i t e d i n v a r i o u s a r t i c l e s on corporate d i s c l o s u r e . 120 Terms of s a l e Marketing techniques or s t r a t e g y F i n a n c i n g plans and methods Customer and source l i s t s P r e l i m i n a r y n e g o t i a t i o n s on mergers and a c q u i -s i t i o n Research and development expenditures i n d i s -aggregative form Expenditures by types of a d v e r t i s i n g D e t a i l e d plans and e x p e c t a t i o n s Baram, i n d i s c u s s i n g trade s e c r e t s , e x p l a i n s why secrecy of p r o p r i e t a r y i n f o r m a t i o n i s d e s i r e d by a f i r m (4): The 17-year period ( i n the United S t a t e s ) of patent p r o t e c t i o n i s often i n s u f f i c i e n t because i n v e n t i o n s normally r e q u i r e a longer period of time, f o l l o w -i n g r e d u c t i o n to p r a c t i c e and p a t e n t a b i -l i t y , before commercial acceptance occurs. Thus e a r l y d i s c l o s u r e of the i n v e n t i o n through the award of a patent only serves to inform the competition of one's s t a t e of the a r t . I n d u s t r y has t h e r e f o r e c o n t i -nued to r e l y on secrecy to p r o t e c t i t s i n t e l l e c t u a l property. A C l a s s i f i c a t i o n Of Corporate Information: I t may thus be necessary to c l a s s i f y corporate i n f o r m a t i o n as p r o p r i e t a r y and n o n - p r o p r i e t a r y (see the f o l l o w i n g page). Where p r o p r i e t a r y i n f o r m a t i o n i s concerned, the p o s i t i o n i s c l e a r . D i s c l o s u r e would be damaging to the c o m p e t i t i v e posture of the d i s c l o s i n g e n t e r p r i s e , and would a l s o have 1 2 1 Corporate Information n o n - p r o p r i e t a r y i n formation p r o p r i e t a r y i n formation f u l l y d i s c l o s e d ? secrecy maintained a s i g n i f i c a n t dampening e f f e c t on i n n o v a t i o n . An exami-nation of the l i s t of items of p r o p r i e t a r y i n f o r m a t i o n would a t t e s t that t h i s would be so. Hence, i n s o f a r as p r o r p i e t a r y i n f o r m a t i o n i s concerned, i t would be j u s t i -f i e d that there i s a need f o r m a i n t a i n i n g i n f o r m a t i o n secrecy. to which the question of f u l l d i s c l o s u r e should be d i r e c t e d . At the present s t a t e of e x t e r n a l r e p o r t i n g , the f o l l o w i n g types of i n f o r m a t i o n are g e n e r a l l y regarded as inadequate-l y d i s c l o s e d * 5 : I t i s i n regard to n o n - p r o p r i e t a r y i n f o r m a t i o n Types Of Information Inadequately D i s c l o s e d Long-term le a s e s Comparative statements C o n s o l i d a t e d f i n a n c i a l statements b This l i s t i n c o r p o r a t e s examples c i t e d i n v a r i o u s a r t i c l e s on corporate d i s c l o s u r e . 1 2 2 Breakdown of s a l e s and p r o f i t (by segments ) C a p i t a l asset breakdown Hidden reserves Business combinations Turnover Funds statement d -Research and development e Plans and e x p e c t a t i o n s S t a t i s t i c s on employees and t h e i r renumeration Recognizing that d i s c l o s u r e : of p r o p r i e t a r y s e c r e t s would unquestionably be damaging to the r e p o r t i n g e n t e r p r i s e , f u l l d i s c l o s u r e i s used i n t h i s study i n a r e s t r i c t e d sense meaning by t h i s term the f u l l d i s c l o s u r e of n o n - p r o p r i e t a r y i n f o r m a t i o n . The f o l l o w i n g c i t a t i o n s are thus p e r t i n e n t : (a) Corporate s e c r e t s , the d i s c l o s u r e of which would u l t i m a t e l y be d e t r i m e n t a l to the s t o c k h o l d e r s , would not be i n c l u d e d , of course. Short of t h a t , the scope of supplemental r e p o r t would be defined only by the l i m i t s c D i s c l o s u r e by "segments", as the term i s used here, means d i s c l o s u r e on the b a s i s of broad i n d u s t r y or product l i n e groupings, and not i n terms of s p e c i f i c products . d I t should be recognized that s p e c i f i c d i s c l o -sure of t h i s item would not be i n a f i r m ' s i n t e r e s t s . e I b i d . 123 of what c o r p o r a t i o n o f f i c i a l s would be w i l l i n g to d i s c l o s e p r i v a t e l y to a n a l y s t s and other r e p r e s e n t a t i v e s of i n s t i t u t i o n a l i n v e s t o r s ( 5 ) . (b) In terms of i n d u s t r y l i n e s , d i s c l o s u r e of earnings w i l l not, according to s o p h i s t i c a t e d a n a l y s t s , r e v e a l any com-p e t i t i v e s e c r e t s . Of course, p r o p r i e -t a r y i n f o r m a t i o n should so remain ( i . e . as s e c r e t i n f o r m a t i o n ) (6). There i s no assurance, however, that f u l l d i s -c l o s u r e of n o n - p r o p r i e t a r y i n f o r m a t i o n would not a l s o be p r e j u d i c i a l to the i n t e r e s t s of an e n t e r p r i s e . Indeed, t h i s would appear l i k e l y f o r an e n t e r p r i s e which operates i n a keenly c o m p e t i t i v e environment. In other words, there might be circumstances where d i s c l o s u r e would be  disadvantageous. But, on the other hand, such d i s c l o s u r e s would be u s e f u l to i n v e s t o r s and other i n t e r e s t e d p a r t i e s . Where t h i s i s the case, i t might be necessary to consider the disadvantages of d i s c l o s u r e v i s - a - v i s the b e n e f i t s to i n t e r e s t e d o u t s i d e r s . T h i s w i l l be discussed i n the remaining part of t h i s chapter. AN EVALUATION BASED ON THE VALUE CONCEPT G r i f f i n and W i l l i a m s , i n a study of a l a r g e number of d e c i s i o n s and r u l i n g s by the United S t a t e s Secu-r i t i e s and Exchange Commission, observes that "when a con-f l i c t of i n t e r e s t s i s i n v o l v e d , suppression of u s e f u l i n f o r m a t i o n i s j u s t i f i e d only when the extent of i n j u r y 124 to the e n t e r p r i s e exceeds the b e n e f i t a c c r u i n g to the p u b l i c . " (7) S i m i l a r l y , Cramer, w r i t i n g on conglomerate d i s c l o s u r e , suggests that "the c r u c i a l question i s whether the nature of business o r g a n i s a t i o n s and t h e i r accounting i s such that greater o p e r a t i n g d e t a i l can be given i n a manner that i s advantageous to more people than those to whom i t i s p r e j u d i c i a l . " (8) Based on an e m p i r i c a l study, a l s o regarding con-glomerate r e p o r t i n g , Mautz concludes, i n t e r a l i a , that ' ' " i t . " i f presented i n a p p r o p r i a t e terms, d i s c l o s u r e s u s e f u l to i n v e s t o r s o r d i n a r i l y need not be harmful to the d i s c l o s -i n g e n t e r p r i s e . In r e c o g n i t i o n of the p o s s i b i l i t y of harm to shareholders i n unusual cases, c o n s i d e r a t i o n needs to be given to r e c o g n i t i o n of hardship cases where the d i s -advantages of d i s c l o s u r e exceed the b e n e f i t s to i n v e s -t o r s . " (9) The same point i s a l s o made by Backer and MacFarland i n a separate survey study of e x t e r n a l r e p o r t -i n g f o r segments of a business. While concluding that i t would be improbable that v a l u a b l e i n f o r m a t i o n might be revealed i n broadly i a s e d segment r e p o r t s , n e v e r t h e l e s s , they recognise that "there may, however, be i n d i v i d u a l circumstances i n which d i s c l o s u r e would work hardship. 125 For t h i s reason, any uniform r u l e s which may be e s t a -b l i s h e d to govern segment d i s c l o s u r e s w i l l need p r o v i s i o n f o r exceptions where management can s u b s t a n t i a t e that m a t e r i a l damage i s l i k e l y to occur." (10) I t i s thus c l e a r from the foregoing statements of the d i f f e r e n t w r i t e r s regarding corporate r e p o r t i n g t h a t , whether there should be or should not be extensive d i s c l o s u r e i n the circumstances must be based on a c o n s i -d e r a t i o n of the p o s s i b l e b e n e f i t s of such d i s c l o s u r e to i n t e r e s t e d o u t s i d e r s v i s - a - v i s the p o s s i b l e i n j u r y by such d i s c l o s u r e to the e n t e r p r i s e . Beyond s t a t i n g that the question of d i s c l o s u r e ought to be considered i n terms of i t s p o s s i b l e b e n e f i t s and i t s p o s s i b l e disadvantages, no suggestion, however, seems to be given by any of the w r i t e r s to e x p l a i n i n e x p l i c i t terms how such a c o n s i d e r a t i o n might be made. The f o l l o w i n g i s , t h e r e f o r e , a suggested conceptual frame-work w i t h i n which t h i s might be achieved. This w r i t e r , however, does not pretend that there are no p r a c t i c a l d i f f i c u l t i e s to be met but, as pointed out e a r l i e r , only the t h e o r e c t i c a l aspect w i l l be d i s c u s s e d . Value Concept: v a x u e i s . i n f a c t , a broad term. I t i s used i n a wide v a r i e t y of ways so that i t s meaning may w e l l be d i f f e r e n t to d i f f e r e n t people. Kohler's 126 f A D i c t i o n a r y f o r Accountants gives the meaning of value as f o l l o w s ( I I ) : (a) Any p r e f e r r e d object or i n t e r e s t t h e r e i n . (b) A t t r i b u t e d worth, expressed i n money and a p p l i e d to a p a r t i c u l a r a s s e t , as the Value of an automobile; to s e r v i c e s rendered, as the value of a man's labour . (c) Hence, l o o s e l y , the amount at which an item appears i n the books or on a f i n a n c i a l s t a t e -ment; c o s t . (d) The q u a n t i t y of other goods or money r e q u i r e d to be given i n exchange f o r a p a r t i c u l a r good; an economic phenomenon based on the process of exchange i n monetary terms i n a market. T h i s corresponds w i t h Clawson's c l a s s i f i c a t i o n o f value (12 ) : (a) Esteem value. (b) Use val u e . (c) Cost v a l u e . (d) Exchange value. Thus, because of d i f f e r e n c e s i n usage, the term val u e , i f used without any q u a l i f i c a t i o n , has almost no s i g n i f i c a n c e . Therefore, a c l a r i f i c a t i o n of the meaning of v a l u e , as the term i s used here, i s a p p r o p r i a t e . In f For an i l l u s t r a t i o n of the many d i f f e r e n t mean-ings of value attached to any a s s e t , see, f o r example, John Heath, "What Is Value?" F i n a n c i a l E x e c u t i v e , June, 1971, pp. 13-15. 127 the context of t h i s study, then, value i s determined by two c o n s i d e r a t i o n : b e n e f i t s and c o s t s . As i s c l e a r from the previous chapters, the b e n e f i t s of f u l l d i s c l o -sure are the sum of the "advantageous e f f e c t s " i t brings about, to whomsoever they accrue; the c o s t s , on the other hand, are the sum of the "disadvantageous e f f e c t s " i f there i s to be f u l l d i s c l o s u r e . I t must be recognised that these b e n e f i t s and costs do not a l l accrue immediately, but over time, more of t e n i n an uneven p a t t e r n . The streams of b e n e f i t s and co s t s o c c u r r i n g through time thus may have d i f f e r e n t s i g -n i f i c a n t v a l u e s . C l e a r l y , then, i n order to permit t h e i r comparison, they must be converted to a common point i n time. A c c o r d i n g l y , the value of the b e n e f i t s and cost s which occur i n the f u t u r e may be discounted back to t h e i r present worth e q u i v a l e n t . Present Value: The present value or present worth i s the value of a sum discounted to the present at a given r a t e . For example, a sum of $110 expected next year i s e q u i v a l e n t to $100 today at 10 per cent per year. This i s because a person expecting to r e c e i v e that SIOO at the end of next year can i n s t e a d borrow $100 today, pay 10 per cent i n t e r e s t f o r one year, and repay i n f u l l the c a p i t a l and i n t e r e s t of $110. In the same way, a person expecting to make a payment of $110 next year 128 could make the payment t h i s year by d e p o s i t i n g 8100 i n a savings i n s t i t u t i o n where i n t e r e s t at 10 per cent i s paid a n n u a l l y . Thus a b e n e f i t or c o s t , expected i n the f u t u r e , i s only worth today what would have to be depo-s i t e d i n a savings i n s t i t u t i o n (or paid i n t o a bank) today i n order to amount to the f u l l expected value i n the f u t u r e (13). Using a symbolic n o t a t i o n , l e t V = sum expected to be r e c e i v e d i n t periods r = r a t e of discount V = present value of sum expected to be r e c e i v e d i n t p e r i o d s . Then the r e l a t i o n s h i p bettveen them i s given by (I + r ) * However, where the stream of f u t u r e r e c e i p t s or payments v a r i e s between one period and another, then i t may be d e s i r a b l e to determine the present value of each r e c e i p t or payment f o r each p e r i o d , and to f i n d the sum of these present v a l u e s . "This may be shown as f o l l o w s V = o 129 n (I + r ) V t t t=I D i s c o u n t i n g Future B e n e f i t s And Future Costs Of F u l l D i s c l o s u r e : The same concept of d i s c o u n t i n g f u t u r e e f f e c t s to the present may be employed i n the c o n s i d e r a t i o n of the b e n e f i t s and co s t s of f u l l d i s c l o s u r e . C o n s i d e r i n g f i r s t the b e n e f i t s , l e t B = t o t a l discounted b e n e f i t s of f u l l d i s -c l o s u r e a c c r u i n g to the p u b l i c and to management. The components of B represent the i n d i v i d u a l b e n e f i t items discussed p r e v i o u s l y which may be d i s -t i n g u i s h e d as f o l l o w s : B = e f f i c i e n t a l l o c a t i o n of resources B = development of c a p i t a l market 3 B = lower cost of s e c u r i n g e x t e r n a l c a p i t a l 4 B = savings on time and expense 5 B = greater s t a b i l i t y i n s e c u r i t i e s markets In each case, the f u t u r e b e n e f i t s may be e s t i -mated c o n c e p t u a l l y and then discounted back to the present I 130 worth as, f o r example, ( I + r ) * where B 1 = present value of estimated. f u t u r e b e n e f i t s a t t r i b u t a b l e to the e f f i -c i e n t a l l o c a t i o n of resources B = b e n e f i t s over a period t r = discount r a t e In t h i s way, the present worth of the estimated f u t u r e b e n e f i t s may be obtained by f i n d i n g t h e i r sum thus 1 2 3 4 5 B . = B + B + B + B + B S i m i l a r l y , l e t C = extent of i n j u r y to the e n t e r p r i s e and to s o c i e t y The components of C represent the i n d i v i d u a l items of p o s s i b l e cost e f f e c t s as discussed p r e v i o u s l y ; these are as f o l l o w s : C* = i n j u r y to c o m p e t i t i v e p o s i t i o n 2 C = d i s i n c e n t i v e e f f e c t on i n n o v a t i o n 3 C = r i s k of m i s i n t e r p r e t a t i o n 131 4 C = a d m i n i s t r a t i v e c o s t s As before, the f u t u r e c o s t s may be estimated c o n c e p t u a l l y and then discounted back to the present worth, f o r example, (I + r ) * I where C = present value of estimated damage as a r e s u l t of i n j u r y to competi-t i v e p o s i t i o n s C - costs over a period t r = discount r a t e Summing up the present values of a l l the e s t i -mated f u t u r e c o s t s gives 1 2 3 4 C = C + C + C + C The t o t a l discounted b e n e f i t s are then compared wit h the t o t a l discounted c o s t s . According to the not i o n that "suppression of u s e f u l i n f o r m a t i o n i s j u s t i f i e d only when the extent of i n j u r y to the e n t e r p r i s e exceeds the b e n e f i t a c c r u i n g to the p u b l i c " or that "the disadvantages of d i s c l o s u r e exceed the b e n e f i t s to i n v e s t o r s " , as men-tio n e d e a r l i e r ^ , then t h i s must imply t h a t : 132 B < ( C On the other hand, there should be more exten-s i v e d i s c l o s u r e wherever i t " i s advantageous to more people than those to whom i t i s p r e j u d i c i a l . " In other words, t h i s means greater d i s c l o s u r e so long as B ^ > C Thus, i n c o n s i d e r i n g the question of corporate d i s c l o s u r e which i s the o b j e c t i v e of t h i s study, the technique of the value concept has been employed as a model. T h i s conceptual model seeks to estimate the present value by the d i s c o u n t i n g of estimated f u t u r e costs and f u t u r e b e n e f i t s of f u l l d i s c l o s u r e , and then to com-pare the t o t a l discounted b e n e f i t s w i t h the t o t a l d iscoun-ted c o s t s . T h i s w r i t e r admits, however, that there may be d i f f i c u l t i e s i n e f f o r t s to q u a n t i f y the above c o n s i d e r a t i o n of c o s t s and b e n e f i t s . The f o l l o w i n g d i f f i c u l t i e s may be mentioned but no attempt w i l l be made i n t h i s study to g See supra, pp. 123-125. h I b i d . 133 r e s o l v e them: (a) E s t i m a t i n g the flows of f u t u r e b e n e f i t s and f u t u r e c o s t s ; (b) Determining the time h o r i z o n ; (c) A d j u s t i n g f o r p r i c e l e v e l changes; (d) S e l e c t i n g the discount r a t e . Techniques may not now e x i s t which w i l l enable the above-mentioned f a c t o r s to be determined w i t h i n reasonable l i m i t s of o b j e c t i v i t y . However, i n time, these d i f f i c u l t i e s would probably be minimized though a d m i t t e d l y , complete o b j e c t i v i t y might not be f e a s i b l e . But these d i f f i c u l t i e s a s i d e , the value concept model, i n the o p i n i o n of t h i s w r i t e r , appears to be c o n c e p t u a l l y v a l i d . SUMMARY O p e r a t i o n a l l y , f u l l corporate d i s c l o s u r e should be bounded by the f a c t that i n f o r m a t i o n that would unques-t i o n a b l y be damaging to the r e p o r t i n g e n t e r p r i s e Should not be d i s c l o s e d . A c c o r d i n g l y , a d i s t i n c t i o n needs to be made between p r o p r i e t a r y i n f o r m a t i o n and n o n - p r o p r i e t a r y i n f o r m a t i o n ; the meaning of f u l l d i s c l o s u r e i s a p p l i e d to the l a t t e r . F u l l d i s c l o s u r e of n o n - p r o p r i e t a r y i n f o r m a t i o n may be considered i n terms of c o s t s and b e n e f i t s or the 134 value concept. Using t h i s conceptual model, i t i s p o s s i -ble to conclude whether or not there should be greater d i s c l o s u r e i n the given circumstances according as the discounted b e n e f i t s exceed the discounted c o s t s or v i c e v e r s a . 135 Footnotes I Robert K. Mautz, F i n a n c i a l R eporting By D i v e r -s i f i e d Companies, F i n a n c i a l E x e cutives Research Founda-t i o n , New York, 1968, p. 67. 2 I b i d . 3 Worth Wade, I n d u s t r i a l Espionage And Mis-Use  Of Trade S e c r e t s , (Ardmore, Pennsylvania: Advance House, 1964) , p. 88. 4 Michael S. Baram, "Trade S e c r e t s : What P r i c e L o y a l t y ? " Harvard Business Review, November-December, 1968, p. 69. 5 Herman W. B e v i s , Corporate F i n a n c i a l R e p orting  In A Competitive Economy, (New Y o r k : - M a c M i l l a n Company, 1965) , p. 179. 6 Martin Mellman, " P r o f i t a b i l i t y D i s c l o s u r e By •Conglomerate' Companies," New York C e r t i f i e d P u b l i c Accountants, August, 1967, p. 598. 7 C . H . G r i f f i n and T.H.Williams, "Measuring Adequate D i s c l o s u r e , " J o u r n a l of Accountancy, A p r i l , I960, p. 43. 8 Joe J . Cramer,"Income Reporting By Conglomerates Views Of American Businessmen," Abacus, August, 1968, p. 26 . 9 Robert K. Mautz, op. c i t . , pp. 153-154. 10 Morton Backer and Walter B. MacFarland, E x t e r -n a l R e p o rting For Segments Of A Business, (New York: N a t i o n a l A s s o c i a t i o n of Accountants, 1968), p. 85. 136 I I E r i c L. Koh l e r , A D i c t i o n a r y For Accountants, (Englewood C l i f f s , New Jer s e y : P r e n t i c e - H a l l , Second E d i t i o n , 1961), pp. 504-505 12 Robert II. Clawson, Value Engineering For Manage-ment , ( P r i n c e t o n : Auerbach P u b l i s h e r s I nc., 1970), p. 27. 13 W.R.D.Sewell, e t . a l . , Guide To B e n e f i t - C o s t  A n a l y s i s , Resources f o r Tomorrow Conference, Ottawa, Queen's P r i n t e r , 1962, p. 16. CHAPTER SIX SUMMARY AND CONCLUSIONS The subject of adequate corporate d i s c l o s u r e has, i n recent yearscommanded the c o n s i d e r a b l e a t t e n -t i o n of a wide spectrum of i n t e r e s t e d p a r t i e s , as may be evidenced by the l a r g e amount of business and accoun-t i n g l i t e r a t u r e r e l a t i n g to the s u b j e c t . The need f o r more and b e t t e r corporate d i s c l o s u r e i s s t r e s s e d by s e c u r i t i e s a n a l y s t s , f i n a n c i a l i n s t i t u t i o n s , shareholder groups, p r o f e s s i o n a l o r g a n i s a t i o n s and, l a s t but not l e a s t , S e c u r i t i e s and Exchange Commissions. At the other end of t h i s spectrum of i n t e r e s t e d p a r t i e s i s the manage-ment group who, wh i l e they are aware of the i n f o r m a t i o n a l needs of o u t s i d e r s , are, n e v e r t h e l e s s , opposed to exten-s i v e d i s c l o s u r e ; they consider these a d d i t i o n a l f a c t s and f i g u r e s "as important m o t i v a t i o n a l l y , l e g a l l y , and c o m p e t i t i v e l y , as w e l l as i n f o r m a t i o n a l l y " ( I ) , u n l i k e the o u t s i d e r s who are only i n t e r e s t e d i n the i n f o r m a t i o n a l aspect. a See, f o r example, b i b l i o g r a p h y , pp. 144-149. 138 T h i s study t h e r e f o r e begins by examining the question of f u l l corporate d i s c l o s u r e from the g l o b a l view-p o i n t . More s p e c i f i c a l l y , i t seeks to i d e n t i f y the r a -t i o n a l e of t h i n k i n g by two opposing i n t e r e s t s : f i r s t , that of o u t s i d e r s f o r more extensive d i s c l o s u r e and, second, that of corporate management f o r t h e i r o p p o s i t i o n to i t . U n f o r t u n a t e l y , the l a c k of c l a r i f i c a t i o n of the concept of f u l l corporate d i s c l o s u r e has l e d to i t s v a r i o u s i n t e r p r e t a t i o n s and, consequently, the views expressed i n favour of or i n o p p o s i t i o n to greater d i s -c l o s u r e might not r e s t upon a common b a s i s . In t h i s study, the need f o r ma i n t a i n i n g secrecy of p r o p r i e t a r y informa-t i o n i s recognised and the meaning of f u l l d i s c l o s u r e i s thus a p p l i e d only to that category of no n - p r o p r i e t a r y i n f o r m a t i o n . Perhaps one of the strongest arguments f o r more exte n s i v e d i s c l o s u r e i s that i t f a c i l i t a t e s investment decision-making. With adequate i n f o r m a t i o n , i n v e s t o r s are enabled to make a more i n t e l l i g e n t s e l e c t i o n of en t e r -p r i s e s f o r investment, and c a p i t a l resources are thereby channelled i n t o uses that promise the highest produc-t i v i t y . The development of the c a p i t a l market, so essen-t i a l i n the p r i v a t e - e n t e r p r i s e economy which i s c o r p o r a t i o n -dominated, and the se c u r i n g of e x t e r n a l c a p i t a l at a 139 p o s s i b l e lower c o s t , are a l l dependent on greater corpo-r a t e d i s c l o s u r e . S i m i l a r l y , t i m e l y d i s c l o s u r e , by check-in g a g a i n s t rumours and s p e c u l a t i v e d e a l i n g s , ensures more s t a b i l i t y i n the s e c u r i t i e s markets. A l s o , d i s c l o s u r e o b v i a t e s the need f o r o b t a i n i n g corporate i n f o r m a t i o n from other sources o f t e n at much cost i n time and money. The l e g i s l a t i v e i n t e n t of r e q u i r i n g corporate d i s c l o s u r e to p r o t e c t i n v e s t o r s against any f r a u d u l e n t p r a c t i c e s by management i s a l s o d i s c u s s e d . I t i s g e n e r a l l y conceded that only a m a t e r i a l item need be d i s c l o s e d . But the concept of m a t e r i a l i t y , however, i s not e a s i l y s u s c e p t i b l e to p r e c i s e d e f i n i t i o n as a review of the l i t e r a t u r e by a u t h o r i t a t i v e accounting bodies and other w r i t e r s has shown. Attempts have been, made to e s t a b l i s h q u a n t i t a t i v e y a r d s t i c k s to measure mate-r i a l i t y . One which t h i s w r i t e r i s i n favour of i s that of s p e c i f y i n g an area i n which d i s c l o s u r e i s c l e a r l y necessary because of m a t e r i a l i t y , an area i n which the s i z e i s c l e a r l y not m a t e r i a l , and an int e r m e d i a t e "area of doubt," which must e v e n t u a l l y be r e s o l v e d i n t o one of the other two. Such an e x p l i c i t g u i d e l i n e would hope-f u l l y provide a common approach i n the i n t e r p r e t a t i o n and a p p l i c a t i o n of the m a t e r i a l i t y concept by c o n f i n i n g the e x e r c i s e of judgement to the narrow border zone. In t h i s way, a more c o n s i s t e n t d i s c l o s u r e p r a c t i c e may be 140 achieved. The q u a l i t a t i v e aspect of m a t e r i a l i t y i s a l s o mentioned i n connection w i t h those items which, because of t h e i r very nature, would r e q u i r e d i s c l o s u r e r e g a r d l e s s of the q u a n t i t y . As suggested e a r l i e r , management i s not only concerned w i t h the i n f o r m a t i o n a l aspect of f u l l corporate d i s c l o s u r e but a l s o i t s m o t i v a t i o n a l , l e g a l , c o s t , and co m p e t i t i v e aspects as w e l l . Thus, from the point of view of corporate management, extensive d i s c l o s u r e would have a dampening e f f e c t on i n n o v a t i o n and the pro p e n s i t y to take r i s k s . I t would a l s o expose management to un-warranted l e g a l r i s k s as a r e s u l t of l o s s e s s u f f e r e d by o u t s i d e r s due to m i s i n t e r p r e t a t i o n s of the i n f o r m a t i o n d i s c l o s e d . There i s a l s o the argument that a d d i t i o n a l d i s c l o s u r e might i n v o l v e c o n s i d e r a b l e e x t r a c o s t s of pre-p a r a t i o n . But probably the str o n g e s t o b j e c t i o n by manage-ment to ext e n s i v e d i s c l o s u r e i s i t s l i k e l y adverse impact on t h e i r e n t e r p r i s e ' s c o m p e t i t i v e p o s i t i o n . Thus the question of f u l l corporate d i s c l o s u r e has been examined from the po i n t s of view of the d i f f e r e n t i n t e r e s t s . In t h i s connection, Mautz's c o n c l u s i o n of what should be the elements of an i d e a l s o l u t i o n i s worth n o t i n g (2): (a) The p r o v i s i o n at minimum cost and r i s k to the r e p o r t i n g companies of informa-t i o n necessary f o r informed d e c i s i o n s by i n v e s t o r s . 1 4 1 (b) The avoidance of any unnecessary d i s -c l o s u r e s which might be c o s t l y and/or troublesome to the r e p o r t i n g company. Here the burden of proof must be upon those who c a l l f o r a d d i t i o n a l d i s c l o -sures. The f a c t that r e p o r t s of a d d i -t i o n a l o p e r a t i n g data w i l l be both c o s t l y and p o s s i b l y troublesome, seems w e l l e s t a b l i s h e d . Those who contend that a d d i t i o n a l i n f o r m a t i o n should be provided, t h e r e f o r e , ought to support t h e i r c o n t e n t i o n by demonstrating that the b e n e f i t s of such r e p o r t s out-weigh the disadvantages and, f u r t h e r , that i n such r e p o r t s there i s no i n e q u i t a b l e f a v o u r i n g of one i n t e r e s t at the expense of o t h e r s . (c) P r o t e c t i o n of a l l p a r t i e s concerned against misunderstanding and m i s i n t e r -p r e t a t i o n of the reported data. The p o s s i b i l i t i e s of misunderstanding and m i s i n t e r p r e t a t i o n are e v i d e n t . Also evident are the r e s p o n s i b i l i t i e s which f a l l upon those who supply f i n a n c i a l data to o t h e r s . I f r e q u i r e d , precau-t i o n a r y measures should be taken both to p r o t e c t those who might use such data erroneously and those who might be held r e s p o n s i b l e i f r e g r e t t a b l e mis-use occurs. E s s e n t i a l l y , what t h i s means i s t h a t , i n the c o n s i d e r a t i o n of corporate d i s c l o s u r e , the "disadvan-tageous e f f e c t s " i n d i c a t i n g p o s s i b l e i n j u r y to the e n t e r -p r i s e should be o f f s e t against the "advantageous e f f e c t s " i n d i c a t i n g p o s s i b l e b e n e f i t s of f u l l d i s c l o s u r e to the p u b l i c . C o n c e p t u a l l y , t h i s i n v o l v e s e s t i m a t i n g the present values by the d i s c o u n t i n g of estimated f u t u r e c o s t s and f u t u r e b e n e f i t s of f u l l d i s c l o s u r e , and comparing the t o t a l discounted b e n e f i t s w i t h the t o t a l discounted 1 4 2 c o s t s . In other words, the model of the value concept i s employed i n t h i s conceptual a n a l y s i s . However, there has been no e f f o r t to consider the p r a c t i c a l s i d e of the model. While the p r a c t i c a l problems may appear gr e a t , n e v e r t h e l e s s , the value concept approach, at l e a s t concep-t u a l l y , seems a sound and v a l i d one. Footnotes I Robert K. Mautz, F i n a n c i a l R e p orting By  D i v e r s i f i e d Companies, F i n a n c i a l Executives Research Foundation, New York, 1968, p. 22. 2 I b i d . , p. 126. 144 BIBLIOGRAPHY I . BOOKS Backer, Morton and MacFarland , Walter B. , E x t e r n a l  R e p o r t i n g For Segments Of A Business, N a t i o n a l A s s o c i a -t i o n of Accountants, 1968. Bedts, Ralph F. De, The New Deal's SEC, (New York: Columbia U n i v e r s i t y Press, 1964). B e v i s , Herman W., Corporate F i n a n c i a l R e p o r t i n g In A  Competitive Economy, (New York: MacMlllan Company, 1965). 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