significance Of Transparency In Financial Reporting

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No one can ignore the significance of transparency in financial reporting, because citizen make big decisions with regard to the investments based on financial reporting. Every investor wishes that he should be able to get more, best and transparent data about the financial data of the company. In fact, it is the capability of report, which helps investors in making safe bet investment decision. Irony is that some companies put in order financial reports, which are the tools for giving insight to the investor, in such a way that rather than providing required data correctly they skillfully hide the facts. It is advisable to the investors that those companies who do not understand the significance of transparency in financial reporting should be avoided. making investments in such companies is more risky and less valuable.

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Meaning Of the Word Transparent;
Before discussing significance of transparency in financial reporting, let us first understand what the word transparent means. The best definition of transparent in firm circles is financial statements of high quality. There are so many definitions in the dictionary. However, the relevant here are "very clear," "easily understood," "candid" and "frank."

Let us understand the significance of transparency in financial reporting with the help of an example. Think of two companies having similar financial leverage, market capitalization and full, market risk exposure. Take for granted that the earnings, increase rate of wage and Return On Capital (Roc) is also same. They have only one divergence and that only divergence is very crucial for the market analysts. First firm is running only one firm and the financial reporting is easy to understand. On the contrary, second firm is complex in running some types of businesses and has complex financial reporting. Now you would like to prefer making investment in which company. Chances are more that experts will favor the first firm because of simplicity and transparency in financial reporting.

Companies, that understand the significance of transparency in financial reporting, are also well informed about the science of mind of the investors. A complex and opaque financial reporting gives no idea about the true risks complex and real fundamentals of the company. Here is a straightforward example of this. An important indicator of hereafter increase of a firm is how it has invested the money. When after going straight through the financial reports, you cannot find any concrete data with regard to the investments made by the firm because of so many holding companies, and then evaluating investments becomes difficult. Obscure statements also hide the level of debt, thereby also hiding if the firm is on the brink of bankruptcy.

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