13.1 INTRODUCTION. Corporate disclosure practices are rapidly changing. More
than ever, they are the focus of attention for policy makers, investors, financial pro-
fessionals, and corporate managers worldwide. The U.S. Securities and Exchange
Commission (SEC) and other securities regulators have been increasing required dis-
closure levels for regulated companies, and monitoring and enforcement activities
have become more intense. Following the widely publicized financial scandals of
Enron, WorldCom, Tyco International Ltd., and other large corporations in 2001 and
2002, investors, lenders, regulators, and lawmakers are closely scrutinizing the level
and quality of corporate disclosure.^1
Individual investors are concerned about the consequences to their portfolios of
inadequate and fraudulent disclosure. Share prices plummet when corporate fraud or
other types of disclosure failures are uncovered.^2 The U.S. Congress and the SEC
view corporate disclosure practices in terms of their impact on U.S. capital markets
and the economy, in addition to their impact on shareholder protection. Analysts at
the Brookings Institution estimate that the recent wave of scandals will cost the U.S.
economy at least US$35 billion. Many commentators blame these scandals, which
have seriously undermined the credibility of U.S. capital markets, for the disap-
pointing performance of the U.S. equities markets during 2002.
The Sarbanes-Oxley Act, enacted by the U.S. Congress in July 2002, was designed
to improve the credibility of U.S. capital markets, in part by improving disclosure by
U.S. and non-U.S. companies active in these markets. However, already it is clear
that Sarbanes-Oxley’s requirements are unacceptable to many foreign companies ac-
tive in U.S. capital markets. If criminal sanctions and other aspects of this law deter
foreign issuers from entering U.S. markets, access of U.S. investors to overseas in-
vestment opportunities will decrease and become more expensive. Thus, it is difficult
to evaluate the tradeoffs involved in imposing more stringent disclosure rules, mon-
itoring and enforcement.^3
Exposure of corporate disclosure-related scandals and increasing stringency by se-
curities regulators are not confined to the United States. As one conspicuous exam-
ple, during 2002, securities regulators in France aggressively investigated Vivendi
Universal for fraudulent financial reporting, including a highly publicized raid on its
corporate offices.^4
Although public attention has focused on scandals involving fraud and misleading
disclosure, the general trend in recent years has been one of dramatic improvements
13 • 2 CORPORATE FINANCIAL DISCLOSURE: A GLOBAL ASSESSMENT(^1) Refer to Accountancy(August, 2002) for a summary of some of the most serious scandals and alle-
gations involving U.S., U.K., French, and Anglo-Dutch companies during 2002.
(^2) See William R. Kinney, Jr. (2000) for discussion of two types of financial statement fraud: misap-
propriation fraud and misrepresentation fraud. Misappropriation fraud is the intentional misstatement of
recorded amounts by employees, ordinarily accompanied by theft of company assets. Misrepresentation
fraud is the intentional overstatement of recorded assets, understatement of recorded liabilities, or use of
improper accounting methods or biased accounting estimates with the intent of overstating a performance
measure such as net income.
(^3) Some U.S.-listed companies already have announced that they may delist from U.S. stock exchanges
if some of the new law’s rules are not relaxed for foreign issuers. Non-U.S. governments and business
organizations, including in the United Kingdom and Japan, have been pushing for exemptions from the
new legislation. For example, Porsche, the German sports car company, announced that it was canceling
its plan to list on the New York Stock Exchange, in response to concerns about the new legislation. For
discussion, see David Ibison and Adrian Michaels (2002), Robert Bruce (2002), Wassener (2002), and
Accountancy(September, 2002).
(^4) See Jo Johnson (2002).