Full Disclosure Principle

What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years?

It is very important for the users of financial information to understand what is included in the financial statements. The full disclosure principle states that an entity should include any information that would affect the user’s understanding of the financial statements. This means that the company should include only the events that have an impact on the financial position. The company should also include in the notes any existing accounting policies along with any changes to the policies. When preparing the income statement, the preparer can include any notes within the line item description. The preparer can include any notes pertaining to the balance sheet at the end of the balance sheet.
In 2002, the SEC, created the Sarbanes-Oxley Act. The Sarbanes-Oxley Act was created to deter companies from committing illegal acts. The SEC created the Sarbanes-Oxley Act after the Enron fraud unfolded. Illegal acts in accounting include political contributions, bribes, kickbacks, and other violations of laws and regulations. Any revenue gained from illegal acts should be disclosed in the notes. If a company participates in illegal acts, the person responsible for the illegal act will receive a significant fine and/or jail time.  
Companies have come a long way since the Enron scandal. The full disclosure principle has given the user a better understanding of how different events affect a company’s financial position.  


Kiesco, D.E., Weygandt, J.J., & Warfield, T.D. (2007). Intermediate Accounting (12th ed.)
Hoboken, NJ: John Weiley & Sons

The Full Disclosure Principle. Retrieved from www.accountingtools.com on 8/2/2011.