Importance of transparency in financial information

No one can ignore the importance of transparency in financial reporting, because people make important investment decisions based on financial reporting. Every investor wants to be able to obtain more, better and more transparent information about the company’s financial data. In fact, it is the quality of the report that helps investors make certain investment decisions. The irony is that some companies prepare financial reports, which are the tools to give an idea to the investor, in such a way that instead of providing the required information correctly, they cleverly hide the facts. Investors are advised to avoid companies that do not understand the importance of transparent financial reporting. Making investments in such companies is riskier and less valuable.

Meaning of the word transparent;
Before discussing the importance of transparency in financial reporting, let’s first understand what the word transparent means. The best definition of transparent in business circles is high-quality financial statements. There are so many definitions in the dictionary. However, the relevant ones here are “very clear”, “easy to understand”, “sincere” and “frank”.

Let us understand the importance of transparency in financial reporting with the help of an example. Consider two companies that have similar financial leverage, market capitalization, and overall market risk exposure. Assume that earnings, earnings growth rate, and return on capital (ROC) are also the same. They only have one difference and that one difference is very crucial for the market analysts. The first company has a single business and the financial reports are easy to understand. In contrast, the second company is involved in running various types of businesses and has complex financial reporting. Now you would like to prefer to invest in which company. Experts are more likely to go with the former because of the simplicity and transparency of financial reporting.

Companies that understand the importance of transparency in financial reporting are also knowledgeable about investor psychology. Complex and opaque financial information does not give an idea of ​​the true risks involved and the real fundamentals of the company. Here is a simple example of this. An important indicator of a company’s future growth is how it has invested the money. When after reviewing the financial reports, you cannot find any concrete information about the investments made by the company due to so many holding companies, then it becomes difficult to evaluate the investments. Dark statements also hide the level of debt, so they also hide whether the company is on the verge of bankruptcy.