Transparency and visibility in accounting: What it means and why it matters

Among the most significant and widespread changes at play in the modern financial landscape is the result of changing attitudes toward accounting and finance. The economic panics and highly publicized corporate fraud cases of the 21st century have enacted some sweeping changes in the business world in a relatively short amount of time. The primary effect has been greater scrutiny of corporations from many angles – government regulators, the media, the public and investors.

“Financial transparency has become a central value proposition.”

In response, accounting firms the world over have begun adopting an ethos of visibility and transparency, not just as an ideal but as an essential part of their business model. The firms that excel at this transformation have reaped immeasurable rewards, while laggards have faced dire consequences.

These changing tides make financial visibility and transparency an essential growth factor for any business, particularly seed- and growth-stage companies.

Increased regulation

Financial visibility is the degree to which a company’s key financial information is easily and accurately accessible to its executives, whereas transparency extends much of this ability beyond the home office. Businesses are legally beholden to a minimum standard of transparency toward the government, investors and the public. But staying within the letter of the law isn’t remarkable in this case. The many market panics and subsequent reforms of the last century are a testament to this fact.

Regulatory action isn’t slowing down, either. The Financial Times reported on recent announcements from the International Accounting Standards Board that more stringent accounting requirements were on the way. In tandem with the U.S. Financial Accounting Standards Board, this marks the third major accounting reform undertaken since the global financial crisis that began in 2008. While the standards are aimed primarily at large multinationals, they apply to firms of any size seeking outside investment. The last of these measures will take effect in January 2019.

Precise financial disclosure and reporting requirements vary by industry and jurisdiction, but as FT noted, they have a tendency to trickle down and impact most businesses. For example, since banks are now required to keep more cash on hand than before, they have tended to become much more cautious when dealing with small, unestablished firms. Without a thorough policy of transparency in place, startups can find it hard to acquire the capital they need to grow.

FinanceBusinesses can’t expect to succeed any longer by only providing the minimum amount of required disclosure.

Going above and beyond

There’s much more to be done in the way of financial transparency than what’s mandated by law. Still, the status quo has long implied that committing to and implementing a culture of financial clarity is easier said than done. Not only that, many executives fail to see the value in such practices. In the modern world of accounting, both of these assumptions are being proven false.

In fact, a number of academic studies have found strong evidence that accounting transparency confers a number of internal and external benefits when done well. One paper published in The Accounting Review studied investor relations programs at several small firms. Investor relations may be thought of as obligatory, but the ones that went above and beyond the norm realized a number of benefits.

Primarily, the study’s authors found that the best predictor of successful investor relations was not just transparency toward investors, but transparency between the IR department and company executives. The firms that successfully bridged the gap between executives and investors saw significant, measurably better outcomes against control groups, including:

  • Higher interest and financial commitment from investors.
  • Greater diversity of investors, from backgrounds that would not normally be interested.
  • Higher market value and book-to-price ratio.
  • More coverage from media and analysts.

Internally, these exemplary companies were able to increase visibility of key performance indicators, proving that accounting transparency is a two-way street. Going above and beyond the bare minimum made these firms more tightly integrated, less fragmented and ultimately unified in their ability to succeed.

Achieving full accounting transparency throughout a seed- or growth-stage business is easier, and cheaper, than many realize with Consero’s new approach to outsourced finance solutions. Get in touch to learn more.

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