As a direct result of the "Enron and WorldCom learning experience," there is an increased demand for transparency in financial statements. It has become sort of a mantra.
If transparency is, in fact, the desired result, we must take a number of key steps for it to be accomplished. This includes a definition of the term, an understanding of what it is and isn't, a dedication to its philosophical underpinnings and ethical requirements, and a mechanism to enforce its use.
In terms of financial statements, transparency should mean that the statement should be clear and easy to understand by the third-party users. They shouldn't need a CPA to translate what the statements are basically saying.
One all-important caution as we strive for greater transparency. We must be on the lookout for illusory transparency where skilled individuals present what the viewer will unwittingly see as clear and easily understood information, even though it is artfully enhanced, omits key facts, and contains a number of falsehoods.
Let's give some examples. How about gems enhanced without disclosure to the buyer? The gem looks like a natural wonder when in fact it was chemically treated and heated to produce that look. Or take the photos in magazines that are computer enhanced. They certainly are sharp and clear. But that is not an accurate picture, and the magazine publisher will probably not tell you of that fact.
Then there are the reality shows in which producers create a false environment, manipulate people to react in a desired manner, and edit the final product to appear as the "reality" that they want.
Since this column is coming out on the day that we vote, it is appropriate I mention the ads in the recent campaign. Virtually no one believed what was said in the ads no matter how clear the statements. Most times when they were fact checked, it was discovered that the statements in the political ads from both sides simply weren't true.
So as we consider what is better rule-based vs. principle-based standards to ensure transparency, let us remember whatever is adopted, including a hybrid of both, will take a while to effectively implement. With the way that certain individuals, institutions, and companies are used to behaving, they will need encouragement to change, and if that fails, they will need to be penalized.
