Final answer:
A firm must disclose its role as a principal or an agent to ensure transparency in financial reporting and risk assessment, which is essential for investors like shareholders and bondholders in making informed decisions.
Step-by-step explanation:
A firm must disclose whether it is acting as a principal or an agent to provide clarity to the parties involved, typically at the point of transaction or within its financial statements. This is important because the role of a firm has implications on the risk and control over the goods or services provided and for financial reporting purposes. In the case of acting as a principal, the firm has control over the goods or services, bears the full risks and rewards associated with the transaction, and records the gross amount of the transaction. When acting as an agent, the firm does not have control over the goods or services, assumes no such risks or rewards, and records only the commission or fee it earns from facilitating the transaction.
For investors like shareholders and bondholders, having transparent information about whether a firm is acting as a principal or an agent is essential for making informed decisions, as this will affect the firm's revenues, costs, profits, and the level of risk on their investment. Thus, as the availability of company information increases and the firm's situation becomes clearer indicating potential profits, the requirement for transparency and appropriate disclosures becomes increasingly important for attracting financial capital from investors who are not personally acquainted with the firm's managers.