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Increased Disclosure Transparency Could Identify Earnings, Cash Flow Problems

Potential earnings and cash flow problems could be more quickly identified wit

Potential negative issues regarding corporate earnings and cash flow could be spotted sooner with increased disclosure and transparency of financial statements, a new report shows.

Fitch Ratings recently released its third annual review of corporate accounting issues. The report takes into account a number of recent accounting standards changes, including guidance for goodwill; pension, tax and convergence issues; and comprehensive income presentation changes. The report also identifies "red flag" practices that could indicate aggressive accounting practices, as well as changes resulting from enhanced footnote disclosures for multi-employer pensions and fair value.

"The most informative recent enhancements to footnote disclosure relate to employers' financial obligations to multi-employer pension and postretirement plans," according to the report. "The new disclosures go a long way toward revealing better estimates of a company's share of its MEPP liabilities and potential impact on future cash flow."

In its most recent corporate report, Prudential Financial claimed losses of roughly $988 million, which it attributed to changes in accounting standards. The company retroactively adopted a Financial Accounting Standards Board guideline governing the deferral of new or renewed contract costs.