It goes without saying that nobody can ignore the whole importance of transparency in financial reporting. It’s because people make decisions concerning their investments based on financial reporting. It’s clear that every investor wants to get more transparent information about the financial data of his company. In fact exactly the quality of report greatly helps investors to make certain investment decisions. But the irony is that some companies make financial reports to provide investors with insight. Perhaps it’s more important than providing them with the required information. These guys can hide the facts. It is advisable for all investors to stay away from those companies who don’t realize the whole importance of transparency in financial reporting. It goes without saying that making investments in these companies is very risky and certainly less valuable.
Now it’s high time to determine the meaning of this word “transparent”. Before discussing the importance of transparency in financial reporting, we should clearly understand what this word means. From my point of view one of the best definitions of transparent is a financial statement of high quality. There are a lot of definitions in the dictionary. As for the most relevant ones I can mention “easily understood,” “very clear,” “candid” and certainly “frank.”
Now we should understand the importance of transparency. I suppose that one example can help us. You should consider two companies having similar financial leverage, overall market risk exposure and certainly market capitalization. You should take for granted the fact that earnings, return on capital and growth rate of earnings mean the same thing. They have got the only one difference and I should say that this difference is very important for the market analysts. First of all an average company runs only one business and in this case financial reporting is very easy to understand. On the other hand some companies are involved in running several businesses at the same time and as follows from this its financial reporting is complicated. Now you need to decide on the company to make investment in. As you might have guessed the vast majority of investors are likely to choose exactly the first company. And there’s no wonder about it because this variant attracts investors by its simplicity and certainly transparency in financial reporting.
It goes without saying that companies realizing the importance of transparency in financial reporting are always well informed about the psychology of investors. I should say that a complex financial reporting doesn’t give an idea about the true risks and fundamentals of a particular company. Perhaps your company is on half way to bankruptcy but you aren’t aware of this and experts don’t know how to help you because your financial reporting isn’t transparent. I hope you’ve just realized the importance of transparency in financial reporting.
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And remember that we live in the world of high online technologies. It wouldn’t be smart not to make use of the Internet network to look for anything on the best terms available on the market. Search engines, social networks, blogs and forums – all this will assist you to make a decision on many issues.