The purpose of the full disclosure principle is to share relevant and material financial information with the outside world. Since outsiders don’t know the details of a company’s business deals, contracts, and loans, it’s difficult to form an opinion of the entity. Relevant information to outsiders is anything that could change an external user’s decision about the company. This can include transactions that have already occurred as well as future events contingent on third parties. Any type of information that could sway the judgment of an outsider should be included in the financial statements in an effort to be transparent.
In a nutshell:
- Disclosure is the process of making facts or information known to the public, which can help identify and prevent fraud.
- Proper disclosure by financial firms is meant to make its customers, investors, and analysts aware of pertinent information and create fairness in markets.
- Even with only partial disclosure, one can easily be drowned in information.
- To make the most of full disclosure, investors need to become educated in investing theory to know what information they should be demanding to fit a given technique.