What Is Accounting Transparency?

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Companies rely on investors, analysts, auditors and preparers for feedback on transparent financial reporting.
Companies rely on investors, analysts, auditors and preparers for feedback on transparent financial reporting. (Image: Creatas/Creatas/Getty Images)

Accounting transparency means offering a clear, concise, and balanced view of your company's financial situation to shareholders. The importance of accounting transparency grew after several prominent business and accounting scandals and heightened government regulations that require companies to comply with specific reporting standards.

Accounting Basics

Accounting is the business process of keeping records of finances. Companies use accounting for two basic purposes: to report financial performance to shareholders and other stakeholder groups, and for use in managerial decision-making. Accounting transparency relates to the financial reporting process of accounting where companies report their financials to the public. This includes distribution of common financial reports such as income statements, balance sheets, statements of cash flow and statements of retained earnings.

Transparent Reporting

Transparency extends expectations for accurate financial reporting beyond basic honesty. Transparent accounting is important because "a complete and understandable picture of a company's financial position reduces uncertainty in our markets," according to a September 2008 testimony before the U.S. Senate Subcommittee on Securities, Insurance, and Investment Committee on Banking, Housing, and Urban Affairs by Director of the Division of Corporation Finance John W. White and James L. Kroeker, Deputy Chief Accountant. Essentially, companies are transparent when they report anything that could potentially impact financiers, including business and investment risks.

Scandals Effect

Many companies have added to the increased call for accounting transparency from the government by engaging in accounting scandals involving inaccurate or incomplete accounting and financial reporting. Companies that are struggling have sometimes reverted to accounting manipulation to hide poor company performance, according to the "Corporate Narc" website. Other service organizations have contributed by participating in unethical activities or conflicts of interest, including finance, auditing, and legal providers. These agencies should contribute to independent and transparent financial reporting but have sometimes failed to separate their agency activities from close interaction with bad business activities and accounting practices.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 presented major, mandatory changes to financial practice and corporate governance for large and small organizations, according to "The Sarbanes-Oxley Act 2002" website. The act established a public company accounting board and included 11 major titles outlining deadlines and compliance regulations that all public companies must follow. A major aspect of the regulation is that it holds CEOs and CFOs directly accountable for the accuracy of financial reporting, preventing them from claiming ignorance when reports are called into question. The act also requires an internal control measure that the company has confidence that it has safeguarded the financial data included in the report.

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