Financial Reporting refers to the detailed accounting process of documentation and communicating financial information over a specific period of time on a quarterly or yearly basis to evaluate the company’s financial performance and stability. There are two types of financial report External and Internal. External reporting serves the purpose to company’s outsiders like the investors, lenders, trade partners, regulatory agencies and tax authorities. While internal reporting serves the purpose to company’s management team assisting them in decision making.

PURPOSE OF FINANCIAL REPORTING

It is a crucial process as it helps the company to track and monitor their income and expense, liabilities and assets. Financial Reporting helps the company in identifying the trends, managing the cash inflows and outflows, enhancing working capital management, future analyses, budget forecasting, and improving business partner relationships by making timely payment establishing creditworthiness with the creditors.

IMPORTANCE OF TRANSPARENCY

Transparency involved openness in financial reporting regarding such obvious matters as trust, accountability, and decision-making towards varied stakeholders who were concerned. 

1. Investor Confidence: In ascertaining the financial position of an operating entity for equity investors, there is a demand for transparency on the reporting of finances, based on the fact that information presented provides the basis for informed decisions regarding buying, selling, and holding. Financial statements are transparent when they have reduced the element of surprise and hidden problems. Such financial statements promote investor confidence.

2. Corporate governance and accountability: It help bring management to book on the performance of the company on the financial front. It gives a clear insight into the operations of the company and makes the stakeholders assess whether the management is using the resources efficiently by working in the best interest of shareholders. It uncovers early unethical or fraudulent activities and therefore lets corrective action in time before maximum damage has been done.

3. Access to Capital: More transparent financial reporting will attract bank financing and investment by more ventures. Any hard and incomplete financial information will be perceived as risky to lenders and investors; hence, raising both cost of borrowing and the cost of accessing capital. It also helps in better value assessment, in case of mergers, acquisitions or partnerships, where the financial position of the company is better understood.

4. Regulatory Compliance: Financial reporting transparencies ensure that there will be compliance with regulations and accounting principles. This is a legal and reputational reason. Companies that do not comply with regulations may attract fines and penalties, including even the procedural process of lawsuits. The US SEC requires companies to maintain open books of accounts primarily for the protection of investors and the general public interest.

5. Stakeholder Decision-making: All these stakeholders require clear financial information to make relevant decisions. For instance, using the information employees can negotiate wages or assess job security, while creditors use it to size the possibility of loan payback. It helps in long-term planning and strategy development, as stakeholders can better assess the company's future prospects.

6. Risk Management: Transparency in financial reporting enables effective management of risk. Knowing the risks confronting a firm in its areas of strength and weakness enables management to develop a plan to minimize risk. It reduces the possibility of financial scandals since transparency discourages manipulative accounting practices.

7. Market Efficiency: This leads to an efficient market since the securities are priced appropriately with existing information. It lessens opportunities for insider trading and market manipulation as the firms provide truthful and credible financial information. 

CONCLUSION

Transparency in financial reporting gives the basis of trust that translates into a healthy business environment by allowing all stakeholders to assess the true financial position of a company and make decisions that may contribute to the stability and efficiency of a financial system

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