Private firms face differing financial disclosure and auditing regulations around the world. In the US and Canada, for example, private firms are generally neither required to disclose their financial results nor have their financial statements audited. By contrast, many firms with limited liability in most other countries are required to file at least some financial information publicly and are also required to have their financial statements audited. This paper discusses and analyzes the reasons for differential financial reporting regulation of private firms. We first discuss various definitions of a private firm. Next, we examine theoretical arguments for regulating the financial reporting of these firms, particularly related to public disclosure and auditing. We then provide new survey-based evidence of firms’ and standard setters’ views of regulation. We conclude by identifying future research opportunities.
5. Discussion and conclusion
Private firms face vastly different financial reporting regulations around the world. In a few countries, the US and Canada, for example, the financial reporting regulatory environment for private firms is quite lax. Firms are not required to report their results publicly nor have their financial statements audited. In Europe, by contrast, many private firms with limited liability are required to do both. In this paper we discuss the definition of a private firm, review theoretical arguments for and against regulating the disclosure and auditing of private firm financial reports and the empirical evidence investigating those theories, and provide new survey evidence highlighting the viewpoints of both the regulators (standard setters) and the regulated (private firms in Europe).
The evidence is consistent with theory in most, but not all respects: individually, firms perceive limited benefits from public disclosure and have proprietary costs. The majority of firms would not continue to disclose their financial results publicly if the regulation was removed. However, the evidence also reveals support for the benefits of public disclosure. Firms reveal that they download the financial reports of competitors, suppliers and customers, and believe that their competitors/suppliers/customers do the same. Moreover, while most firms would not reveal their financial reports if given the option, the majority still believe that public disclosure should be required. We think these perspectives reveal the positive externalities of mandated disclosure. While public disclosure may not be net beneficial to the disclosing private firm, it is collectively beneficial as a result of an improved information environment.
