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The importance of financial transparency

17/05/2022 minute read Daniel Docherty

Finance professionals today must recognise the importance of accounting transparency requirements if they want their business to be successful. Transparency has taken on a whole new meaning with the imperative stretching from individuals to institutions alongside the rising pressures on companies to open up to stakeholders such as investors, employees, suppliers, governments, and customers.

The pandemic exposed underlying economic and social inequalities and raised questions about how we will deal with climate change through the race to Net Zero. Organisations in the private sector will need to respond to this by demonstrating to investors that they can build resilience to future shocks, and to society at large that they are committed to long-term, sustainable value creation and a carbon-neutral economy.

Complex and opaque financial reports offer no clues about the true risks involved and the real fundamentals of the organisation in question. Moving forward, for finance functions, this means that finance reports will need to be transparent so that investors can easily understand their company’s financial details.

Investors today expect to be able to see exactly how a company manages its holdings, earnings, and debt, and that expectation extends to those who wish to monitor in real time their investments and evaluate the company's performance. In this article we will cover the fundamentals of financial transparency and how CFOs can begin to take steps to improve their existing reporting processes.

What is financial transparency?

Financial transparency is the practice of sharing financial information with the C-Suite, investors and employees. By empowering employees with the knowledge and tools to participate in company finances and productivity metrics, it can initiate a substantial cultural shift within an organisation. This all comes down to an organisation’s responsibility, ownership, results, and growth coming together to drive the needle forward.

For companies looking to become more financially transparent, open-book management is the flagship approach which is often called open finances or open books is to give employees the knowledge and tools to help them understand how the company is run and what their stake is in financial outcomes. When employees understand this information, they’re better able to adapt to changes, stay committed to company goals, and take ownership of their work daily.

This then ties back to connecting employees to the purpose of the organisation and its core values. Open-book management deepens employee engagement by helping them understand how they can impact the company in their individual roles.

The link between financial transparency and compliance

Pressure for greater financial transparency is resulting in the search for common, objective, and enforceable standards for nonfinancial information, a process which is still in its infancy. There are many metrics and measurements included in reports, from carbon footprint to gender diversity, all with different levels of ambition.

This makes it hard for finance teams to map different frameworks onto one another to make meaningful comparisons which then makes it equally difficult for the C-Suite, investors and employees to understand which standards are most significant.

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 analyse a company’s position.

It will take some time for non-financial reporting to achieve a comparable standard to GAAP in the financial arena, but significant progress is being made in building trust through assurance. For example, stakeholders expect financial information to be audited with the same need being present for equally important non-financial information such as the measurement of an organisation’s Environmental Social Governance (ESG) activity.

The importance of a transparent financial process

As people make big decisions regarding investments based on financial information, there can be no ignoring the importance of transparency in finance. It is important for investors to have more access to financial data about a company. As a matter of fact, it is the quality of a report that helps investors make certain investment decisions, but the irony is that some companies prepare financial reports intended to give investors insight by concealing important information rather than providing it.

An important indicator of future growth of a company is how it has invested the money. Investing can be difficult when you cannot find any information about the company's investments in its financial reports due to the presence of so many holding companies.

Additionally, obscure statements hide the level of debt, therefore concealing whether an organisation is potentially facing bankruptcy.

The consequences faced by these types of organisations, if discovered, are that investors will likely withdraw from future investments, which will lead to the snowball effect of lost future investments and ultimately ruin the reputation of the company.

How financial transparency improves stakeholder relations

Employees can better understand the big picture when financial information is shared with them. It might mean sharing both the positive and the negative aspects, even if cash flow is tight in some areas, as when your employees have this crucial info, they can confidently perform their tasks.

Providing financial transparency to stakeholders means that you equip them with regular information about the company's finances, so they can participate in budgeting and planning. It is also possible to provide financial data and insights to the entire organisation - without adding to your workload or affecting your general ledger.

In addition to boosting employee confidence, financial transparency also provides a much-needed boost to the bottom line. Before sharing financial data with non-finance employees, consider whether they will be able to understand the numbers or whether that will take them away from their usual daily tasks. There are times when finance teams are so swamped with manual tasks that they can't spare extra time to educate employees about basic financial terms.

It is not always possible to teach financial literacy to employees from different departments by handing over a stack of papers and numbers. This is why finance managers require an intuitive and easy-to-use Cloud accounting software system that enables everyone to view financial information and even contribute their own insights.

The benefits of financial transparency

It can be a complete game changer when the C-Suite, investors and employees understand the whole financial picture of company performance.

Here are some of the main benefits of having financial transparency processes in place:
  • When numbers are openly shared, better decisions can be made, employee confidence increases, and finance is increasingly perceived as a positive attribute in the company.
  • Employees gain a better understanding of how the company is doing and about how their work contributes to the achievement of company goals which also helps boost confidence and facilitates effective decision-making.
  • As employees improve their financial literacy, they gain valuable skills they can use both personally and professionally.
  • With everyone having access to the same data, collaboration opportunities and further insights are created.
  • Having insight into financial data enables the C-Suite to make fast, accurate decisions.
  • Team members can take ownership of their work more easily by understanding financial changes, adapting, and adhering to company goals.
  • It is also possible to use Financial Planning and Analysis (FP&A) to gain a wider understanding of all business areas across a company.

Improve financial transparency in reporting with Financials

Many finance teams aim to become more strategic and guide business decisions based on key findings through transparent financial reporting. However, when data is difficult to access and analyse, this can become a challenge across the whole organisation.

To facilitate this process, we have built a powerful reporting and dashboards engine into the core of Financials. This gives finance teams the power to lead strategy based on accurate, real-time information reported transparently across the organisation.

Finance functions can utilise financial management processes in the Cloud to streamline everything from keeping the C-Suite, investors and employees informed about ESG progression and cash flow, for example, through transparent and clear financial reporting. 

Get in touch with one of our experts today.