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"Full disclosure" has long been a guiding principle for financial reporting. Yet there are clear signs that this principle isn't as useful as it once was in ensuring that the information needs of report users are met. In this month's column, I'll explain why full disclosure is no longer a useful goal. I'll also briefly describe how standards setters and regulators have begun to shift their focus from full disclosure toward effective disclosure.

"Full" Is Subjective

The word "full" conveys completeness. As such, it implies the existence of a quantitative and/or qualitative benchmark against which completeness can be assessed. Then what's the appropriate benchmark to use in assessing whether disclosures that are included in financial reports are "full"? The answer depends on the reporting entity and report users.

Financial-reporting standards, such as U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), require each reporting entity to make specific disclosures in notes that accompany the entity's financial statements. But financial-reporting standards vary among countries and types of entities. As a result, full disclosure for one entity could be a subset of, a superset of, or simply different from full disclosure for another entity. Thus, from the entity's perspective, financial-reporting standards provide only a subjective benchmark for assessing the fullness of disclosures in financial reports.


Additionally, stakeholders of an entity may expect more, less, and/or different disclosures than those that are prescribed by a particular set of financial-reporting standards. For example, in early 2012, Chesapeake Energy Corporation's shareholders were dismayed to learn that the company's chief executive officer (CEO) had engaged in certain personal financial deals with third parties--previously undisclosed transactions that were perceived as having the potential to compromise the CEO's fiduciary duty to the company's shareholders. The revelation of those transactions caused Chesapeake's stock to lose $500 million in market value. But my research into this matter led me to conclude that Chesapeake had not failed to adhere to the disclosure rules of U.S. GAAP or the regulations of the U.S. Securities & Exchange Commission (SEC). Does that mean that Chesapeake's investors shouldn't have been upset? No. In this case, investors' subjective benchmarks for full disclosure hadn't been met even though standards-based benchmarks were met.

As illustrated, the "full" in "full disclosure" is very subjective. Because we lack widespread agreement on what "full" means, "full disclosure" isn't really a useful principle for guiding financial reporting.

"More" Isn't Necessarily "Better"

Given that a universally accepted, objective standard for "full" disclosure doesn't exist, can we simply assume that more disclosure is always better than less disclosure? No. For three specific reasons, more disclosure isn't necessarily better.

First, as I summarized in my September 2011 column, …