Opening Up the Doors to Transparent Accounting

In 2002, companies like Enron became industry—if not household—names with a number of very public accounting-fraud situations. The result of so many issues of such large scale was an emphasis on transparent accounting that became a top priority of state and federal regulators. Beginning with the Sarbanes-Oxley Act, numerous regulations over the past decade have placed stricter guidelines on accounting services to promote transparency and ethics.

Some outside the accounting profession may question the need for regulations to keep organizations in check, but when money's involved, scandals can happen in the most unexpected places. In June, a priest associated with the Vatican was arrested on suspicion that he and accomplices were using the Vatican's bank to move money for organized crime. Reports surrounding the incident state that European officials have been urging the Vatican to adopt more transparent accounting procedures for years. From religious organizations to local governments and small businesses, transparent accounting is becoming a growing trend among financial organizations.

Transparency isn't just a reaction to demands from regulators, though. According to a study published in a 2013 issue of the Journal of Accounting and Economics, transparent accounting can drive higher valuations for stock or businesses. It seems like a common-sense conclusion: When investors trust that accounting data published by a business is accurate, they are more likely to risk funds with the company. The study breaks down the phenomenon using specifics about the cost of capital, rates of return, and company valuations. The premise can also be applied to small accounting and finance companies. Transparency allows clients to fully trust those providing accounting services, which can result in customers using additional services, recommending services, or retaining services.

Despite its benefits, transparent accounting is still running into barriers in organizations of all sizes and types. While a few individuals in the profession prefer to keep things murky to hide unethical behavior, the vast majority of professionals are simply overwhelmed with convoluted structures, legacy systems, and the implementation of policies based on misunderstood regulations. An example of these problems is illustrated by the troubles experienced by California's Monterey County Water Resources Agency. In 2011, Steve Collins, the director of the agency, resigned due to conflict of interest allegations—he was being paid by a company vying for a $26 million contract from the agency. Investigations into the agency's financial structure revealed a convoluted confusion of accounts, payments, and funding. Things were so disorganized that accountants are still struggling to figure out where and how money was used on a failed waterworks project.

Accounting professionals can understand the gravity of a situation that leaves millions of dollars in question. Transparent accounting procedures remove confusion and hold all officers or agents responsible for ethical, legal use of funds. Experts believe that individuals and companies across all industries will see a positive impact as transparency becomes the normal way to handle finances.

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