According to the Securities Law, the two main reporting violations involve a company's prospectus and its financial statements, the primary instruments that public companies use to report to their investors and public. Reporting violations are violations of the principle of disclosure, which is the basis of the law that imposes reporting obligations on publically traded companies. Reporting obligations are designed to furnish the investor public precise, up-to-date information about the company; prevent investors from being misled; deter corporate officers from committing fraud or manipulating the market; make it possible to oversee corporate activities; and ensure that the financial market is efficient.
Examples of reporting violations:
1. Prospectus contains a misstatement:
A public company is performing a public offering of its shares. In its prospectus, the company states that it intends to use the proceeds from the issue in the ordinary course of its business, subject to resolutions of the board of directors, from time to time. One week before the issue, the company CEO and the chairman of the board decide that since the company has no immediate need of the funds raised by the issue, the entire proceeds of the issue will be transferred to an investment portfolio manager and will be invested in various high-risk derivatives and financial instruments. This decision does not appear in the prospectus published to the public. Several few months after the issue, the company suffers enormous losses on its investment portfolio, which almost wipe out the proceeds of the issue.
2. The main supplier of a public company is a large foreign company, and one of the few companies in the world that manufacture the components that the public company requires. The supplier notifies the public company that, for various reasons, it will stop supplying the components to the public company within 30 days, a move that is liable to have a dramatic effect on the public company's business. The CEO of the public company decides not to report the news to the public before the 30–day period, in order to exhaust all efforts to change the supplier's mind or find another supplier.
3. The financial statements contain a misstatement: A public company enters into an agreement to lend a second company NIS 10 million. The companies later agree that the loan will be repaid in the form of services rendered by the borrower to the lender. This information is reported in the public company's financial statements. At some point before most of the loan has been repaid, the second company becomes insolvent and stops providing services to the public company. The public company's financial statements fail to disclose the fact that this debt has been a bad or doubtful debt that requires a provision to be made. Moreover, the note referring to the loan states that the company is continuing to receive services from borrower.