Introduction
A financial report reader could be an investor, analyst, system regulator, other financial paper drafters or anyone interested. It is the readers’ wish to get trustworthy and transparent data of the company. The clear and easy to understand a report is, the easier it is for the investor to make investment decisions. The term that defines transparency is a report that is of high quality. Transparency can help greatly to improve the communication between the drafters and the policy makers, with the readers and publishers. It helps also in the push for companies to give information that is reliable under a standardized framework (McEwen 68).
Importance of transparency
Studies show that transparency touches on a broad range of business activities, from a single company to an entire nation. The psychology of an investor is positively appealed to through good financial reporting. Risks have to be seen to be elaborated without much complexity. Reports that are complicated may tend to hide the level of debt a company may be in. High caliber investors may affect the economy though their decisions for or against investment in a certain country. It is of utmost importance for a country to embrace proper standards set for their financial release in order to attract foreign investments (Mensah, Nguyen and Prattipati 48). In the country level, transparency is attained through the measure of the economic value of a transaction, by how it is accounted for. A financial analyst in dire needs to get conclusions of a business firm through its report anywhere in the world is what this paper tries to address. The acceptable practice of transparency reporting is this paper’s main aim (McEwen 90).
Steps to attain transparency
The main steps to attain transparency are the analyst coming to knowledge of a company’s current and future economic health, getting to know the risks to be taken in the days ahead, evaluating the openness of the financial reports availed, assessing the company’s profitability and forecasting predictions. A satisfied analyst is one whose company’s reports are open enough to accord him/her the ability to draw clear conclusions (Mensah, Nguyen and Prattipati 48).
Transparency levels
Failure of transparency from the top level will affect the quality of the subsequent levels. The first level is about transactions and events that directly affected the business current economic position. Any lack of information disclosure at this level has a direct impact on the overall analysis. As an analyst, the report given by auditors is useful for this level. The second level is a look into the accounting methods that were employed. The analyst checks on the adopted principles and seeks an explanation of their application. Lack of proper information inclusion may leave the analyst without a clear view of whether the right methods were employed or not. Level three deals with the various decisions the management took (Mensah, Nguyen and Prattipati 49).
These were the ideas they sought to apply and reasons as to why they took some of them. The ideas are then weighed in on their contribution or lack of to the entity’s economic value. By the time the analyst reaches the fourth level, he uses the information on the second and third level to determine the next levels. Here, the look of economic substance is the main activity. Through evaluating the previous reports given, a financial analyst is then able to make predictions on the future and views on the present cash flows. With this, the forecast starts to take shape. Fifth stage is the forecasting. This is made possible by the higher levels of transparency. By looking at the company’s progress over time, the future prediction is easier made. The final level is the access and integration. The emphasis on this stage is the use of friendly materials for easier and faster comprehension (Mensah, Nguyen and Prattipati 51).
Conclusion
Companies are encouraged to borrow and apply this system of financial transparency level reporting. Work that is divided into different layers does offer distinct goals and accountability systems to be adhered and attained. Approaching disclosure without a well laid-out plan can lead to omissions finally resulting in the altered report. This is to help the analysts ease and effectively carry out their work with acceptable levels of transparency being easily observed.
Works cited
McEwen, Ruth A. Transparency in Financial Reporting: A Concise Comparison of Ifrs and Us Gaap. Petersfield: Harriman House, 2009. Print.
Mensah, Michael O., Hong V. Nguyen, and Satya N. Prattipati. “Transparency in Financial Statements: A Conceptual Framework from a User Perspective.” Journal of American Academy of Business, Cambridge 9.1 (2006): 47-51. Print.