Accounting reports need to be transparent so that investors can easily understand a company’s financial details. Contemporary investors expect to see exactly how a company manages its holdings, earnings, and debt with just a few clicks. They can also watch in real time how their investments are faring and evaluate the company’s overall performance.
“Companies that understand the importance of transparency in financial reporting are also well informed about the psychology of the investors. A complex and opaque financial report gives no idea about the true risks involved and real fundamentals of the company” according to StreetDirectory.com.
Understanding accounting transparency requirements is a crucial part of successful practice for today’s financial professionals. A masters in accountancy online, such as the degree offered by the University of North Dakota, can help accountants sharpen their skills in this critical field and appreciate the career benefits of accounting.
GAAP Standards and Guidelines
The current, most accepted standard for accountants is the Generally Accepted Accounting Principles (GAAP), overseen by the Financial Accounting Standards Board (FASB). The FASB, recognized by the Securities and Exchange Commission, interprets how GAAP should be used. With these safeguards, accountants can provide consistency and regularity in its reports, so that investors can easily analyze a company’s position.
GAAP grew out of the stock market crash of 1929 and the Great Depression. The crisis that followed spurred the creation of the Securities and Exchange Commission (SEC), whose goal was to regulate financial practices. When the SEC asked the American Institute of Accountants to examine financial statements, its oversight led to the development of GAAP in 1936.
The 10 Principles of GAAP
GAAP’s 10 principles were designed to make analyzing reports easier for investors. They establish a minimum standard of consistency that allows better understanding of company finances. Investopedia summarizes them this way:
- Principle of Regularity. The accountant has adhered to GAAP rules and regulations as a standard.
- Principle of Consistency. Professionals commit to applying the same standards throughout the reporting process to prevent errors or discrepancies. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards.
- Principle of Sincerity. The accountant strives to provide an accurate depiction of a company’s financial situation.
- Principle of Permanence of Methods. The procedures used in financial reporting should be consistent.
- Principle of Non-Compensation. Both negatives and positives should be fully reported with transparency and without the expectation of debt compensation.
- Principle of Prudence. Reports emphasize fact-based financial data that is not clouded by speculation.
- Principle of Continuity. The business continues to operate while assets are being evaluated.
- Principle of Periodicity. Entries should be distributed across the appropriate periods of time. For example, revenue should be divided by its relevant periods.
- Principle of Materiality/Good Faith. Accountants must strive for full disclosure in financial reports.
- Principle of Utmost Good Faith. Derived from the Latin phrase “uberrimae fidei” used in the insurance industry, this principle presupposes that parties remain honest in transactions.
The Increased Importance of Transparency
Even with GAAP in place, as well as online reports and easily digestible financials, not all companies hold fast to the highest standards. Fraudulent accounting at some major companies, such as Enron and Arthur Andersen, caused many shareholders to lose their savings.
“The scandals shook the public’s confidence in the reliability of financial reporting and led to the demise of the venerable Arthur Anderson,” according to Jason Zuckerman and Matthew Stock in Going Concern. These scandals led to the Sarbanes-Oxley Act (SOX) of 2002.
SOX added the requirement that officers who sign reports flag any problems, including fraud. Further, Section 303 prohibits anyone from fraudulently influencing, coercing, manipulating, or misleading accountants who are conducting an audit. The act also gives auditors additional protection in situations where they are publishing reports and face obstacles to transparency within their own companies.
Even More Transparency Needed
Recent scandals underline the need for additional levels of transparency in accountants’ reports. Details and fraud can easily be hidden, as in the case of the Wells Fargo fake accounts scandal in which 3.5 million accounts were created to collect fees, according to Fortune.
In another scandal, 45 shareholders sued Toshiba for false accounting.
“Toshiba is still overcoming the reputational and share price hit of an investigation last year (2015),” according to Fortune, “that found widespread accounting errors throughout its sprawling business, blaming a corporate culture in which employees found it difficult to question their superiors.”
What Else Do Accountants Need to Know About Transparency?
GAAP, in concert with Sarbanes-Oxley, provides accountants with clear guidelines and responsibilities to investors.
“Corporations are now required to show their true financial status so investors and stockholders can make sound financial decisions based on the information,” reports Business Training Schools. “Sarbanes-Oxley not only required this transparency in the reporting, but now corporations are required to disclose any information on material changes to their financial status or operations. Not only must they report it, but they must report it in a manner that is understandable and timely.”
University of North Dakota’s Master’s in Accountancy Online (MAcc) Program
The M.Acc. program at the University of North Dakota (UND) is accredited by the Association to Advance Collegiate Schools of Business (AACSB International), placing it in the top 5% of schools around the world.
The program immerses students in advanced accounting concepts, contracts, negotiable instruments, ethics, business law, analyses of financial statements, complex transactions and risk assessment. For more information, visit UND’s website.
The Importance of Transparency in Financial Reporting: StreetDirectory.com
Generally Accepted Accounting Principals: Investopedia
The Ten Generally Accepted Accounting Principles ( GAAP): Invensis
Sarbanes-Oxley 15 Years Later: Accountants Need to Speak Up: Going Concern
Why Wells Fargo Might Not Survive Its Fake Accounts Scandal: Fortune
The Sarbanes-Oxley Act of 2002, Section 303: SEC