Transparency in Accounting

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Transparency in Accounting The Culprit or the Revealer?
Transparency in accounting has been a controversial issue in recent years largely due to events such as the fall of Enron, the WorldCom scandal, and the latest financial crisis. Supporters of greater transparency used these opportunities to demonstrate that if companies had been more transparent in the beginning, investors would have been better informed of reality and the financial crisis would have been less severe. On the other hand, critics blame transparency and the accounting profession for the financial downturn by citing Statement No. 157 issued by the Financial Accounting Standards Board (FASB) which deals with mark-to-market accounting (Rose and Trussel 2009). “Depending on the audience, fair value accounting is either the most controversial aspect of modern accounting or the most highly desired result of FASB’s current standards-setting project” (Schuetze 2006). The debate surrounding transparency raises the question of whether having transparency in accounting causes crises to occur or merely presents investors with an opportunity to “see” what is truly occurring within a company by reading the financial statements.

What is transparency in accounting? Is valuing the employees and reporting that figure on the balance sheet an example of transparency? Without a consensus definition, pinpointing the true meaning of accounting transparency can be difficult. A simplistic defining of the phrase is when a company fully discloses its information to users. Adjectives used to further describe accounting transparency are relevant, reliable, understandable, and timely. Another method to explain transparency in accounting is to illustrate what transparency is not. Accounting transparency should be the opposite of its antonym, opaque, which is defined as “… hard to understand, obscure” (McAllister 2003). Regardless of the method used to define the phrase, businesses are realizing the need to be transparent. Financial markets and investors are not fond of negative surprises, which is why increased transparency builds confidence in the markets. Greater transparency in accounting allows investors and other financial statement users to evaluate the full realm of risks involved in a particular company before making a financial decision. The more relevant and reliable information a business provides, the more investors will trust the company and its operations. This reason is often why the more transparent corporations outperform others over time. Transparency helps put investors’ hesitations at ease and assures them that the company is not trying to hide a shady aspect of the business. Another reason for the need of increased transparency is to guard against companies attempting to manipulate earnings through impairment recognition. Businesses are more willing to report impairments in years of abnormally large profits because doing so allows companies to smooth earnings. This practice is the type of concern that accounting transparency seeks to eliminate. Businesses should be required to report an impairment in the year it occurs, regardless of the magnitude of profits for that year. Transparency should not be an option for companies to pick and choose when to abide but mandatory for them to follow at all times.

An additional reason for more transparency in accounting is the lack of such can lead to complex financial schemes by managers and executives, as was the case with the Enron debacle. Lack of transparency is an inviting environment for “gray-area” accounting, which may ultimately lead to fraud. In these conditions the opportunity component of the fraud triangle is highly present because investors are not fully informed about what is taking place within the company. However, like Enron, a business can be in compliance with General Accepted Accounting Principles (GAAP) and not have transparent reporting (McAllister 2003). Knowing this fact, companies must be held...
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