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Should private companies be required to report their financials?

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In the United States and Canada, financial-reporting regulations focus on publicly traded securities. Private companies, without publicly traded debt or equity, aren’t required to either publicly disclose financial statements or have their financial statements audited.

But many public and private businesses in Europe that are subject to financial-reporting rules embrace the requirements, according to a survey of more than 2,000 European companies conducted by Chicago Booth’s Michael Minnis and MIT’s Nemit Shroff. Business managers reportedly value the ability to inspect financial disclosures of other companies, the survey suggests.

Minnis and Shroff’s study included European businesses and 25 accounting standard setters around the world. They find that a slight majority of the respondents support European financial-reporting-disclosure requirements, which are based on business size rather than ownership structure. The European Union generally requires any company employing at least 50 people and generating at least €5 million in annual revenue to disclose financial results and undergo annual financial-statement audits.

While few of the respondents said they would voluntarily release these data, a small majority of them agreed that public disclosure should be required.

The researchers report that businesses in Europe routinely download the financial reports of their competitors, suppliers, and customers. While few of the respondents said they would voluntarily release these data, a small majority of them agreed that public disclosure should be required, according to the survey. “They potentially view disclosure useful if everyone collectively does it,” Minnis says.

The respondents confirmed that they do not like disclosing their own financial data for often-cited reasons, such as the risk that competitors could discover their high-margin work, or that customers and competitors could learn of their financial constraints. But the findings suggest that, at least in some cases, the ability to profit from additional financial information about competitors makes the risk of disclosure worthwhile.

The survey results also indicate that most of the respondents preferred the European disclosure requirement over the more-opaque business practices of the US and Canada. Some of the biggest corporations in America—such as Cargill, Koch Industries, and Dell—generate billions of dollars a year in revenue and employ tens of thousands of people, without financial-disclosure requirements.

However, in contrast to their feelings about the requirement to disclose financial statements, the European companies surveyed did not like a related mandate to have those statements audited, mainly because of the costs. A significant minority of respondents also found no public benefit from financial audits.

The study delves into the arguments for and against requiring financial disclosure for closely held companies, including a review of literature that analyses the costs of enforcing disclosure regulations and complying with them. A benefit cited for requiring public financial disclosure includes giving stakeholders such as investors, employees, and customers a more accurate picture of the status of an industry as well as actionable information about any individual company.

This article was contributed by the University of Chicago Booth School of Business.

Dee Gill

Dee Gill is a freelance writer with extensive experience storytelling for national publications and business clients.

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