It’s impossible to overlook the importance of transparency in financial reporting, since people make big decisions in connection with investments based on financial reporting. Every investor wishes he can get more, better and transparent information about the financial data of the company. In reality, it does not take quality of report, which assists investors to make certain financial investment. Irony is some companies prepare financial reports, let’s consider tools for giving insight for the investor, in such a way that rather than providing required information correctly they skillfully hide the reality. You should the investors those companies who do not view the need for transparency in financial reporting must be avoided. Making investments such companies is more risky and much less valuable.
Concept of the phrase Transparent;
Before discussing value of transparency in financial reporting, why don’t we first determine what the term transparent means. The very best meaning of transparent running a business circles is fiscal reports good quality. There are plenty of definitions in the dictionary. However, the appropriate here are “very clear,” “easily understood,” “candid” and “frank.”
Let us understand the value of transparency in financial reporting by making use of an illustration. Imagine two companies having similar financial leverage, market capitalization and overall market risk exposure. Neglect that this earnings, growth rate of earnings and Return On Capital (ROC) is additionally same. They’ve just one difference understanding that only difference is quite crucial to the market analysts. First clients are running merely one business along with the financial reporting is not hard to comprehend. However, second clients are involved in running several types of businesses and contains complex financial reporting. You now would want to prefer making investment in which company. Chances are more that experts will favor the very first company due to simplicity and transparency in financial reporting.
Companies, that understand the importance of transparency in financial reporting, are also well informed concerning the psychology in the investors. A complex and opaque financial reporting gives no idea regarding the true risks involved and real fundamentals from the company. Here’s a simple demonstration of this. A crucial indicator of future development of a company is the place it has invested the cash. When after studying the financial statements, you cannot find any concrete more knowledge about the investments created by the company because of so many holding companies, after which evaluating investments becomes difficult. Obscure statements also hide how much debt, thereby also hiding if the company is getting ready to bankruptcy.
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