Content:

1. Why are Financial Disclosures Important for Investors?
2. How do Audits Promote Transparency?

How Financial Disclosures Affect Auditors and Investors — Audits are formal examinations of company financial records. They reasonably assure that a company’s financial statements accurately reflect its financial status and outlook. Auditors offer a professional third-party opinion about the credibility of the company’s financial reports. 

Companies often specify financial disclosures in their financial statements. These financial disclosures are both quantitative and qualitative. Quantitative financial disclosures include analyses of balances and transactions, revenue, profit, and major customer information. Qualitative financial disclosures contain information on accounting policies and procedures, discussion on risk areas, and going concern assumptions. Auditors review these financial disclosures, request evidence as proof and ensure the company is honest about its disclosures.

This blog explains the importance of transparency in financial disclosures. 

Why are Financial Disclosures Important for Investors? 

Financial disclosures contain all necessary information about an organisation that could affect investors’ decisions. As mentioned earlier, it includes quantitative and qualitative information to cater to the needs of all types of investors and stakeholders. 

Transparency in financial disclosures is based on concisely and truthfully disclosing relevant information to stakeholders. It means that all parties, including auditors, stakeholders, lenders, and investors, should have access to identical and comprehensive information about the company. Financial disclosures are deemed adequate and transparent when the financial information provides a clear outlook of the company’s financial situation. 

Transparent financial disclosures are essential for investors because they affect decision-making. Investors need reliable information to help them choose whether they want to invest in a company or what product they want to invest in. Incomplete or inaccurate information could affect investors’ ability to make a wise investment decision.

How do Audits Promote Transparency? 

Transparency is crucial in financial markets because it provides clarity for investors, stakeholders, and customers about the financial transaction they intend to make. For investors, transparency includes financial information about the company, like audit reports. For customers, transparency includes information about fees and rates. 

Audits promote transparency in financial disclosures by ensuring that disclosures are accurate. Auditors need access to comprehensive financial records and sufficient evidence to make a fair judgement. The audit process encourages companies to provide proof to back up the disclosures made in their financial statements. Providing proof improves the transparency of their financial disclosures. 

A company with greater clarity in financial disclosures will build investor, stakeholder, and customer confidence. Audits increase a company’s trustworthiness because financial evidence that is reviewed and approved by certified auditors is perceived to be more credible. 

Audits reduce information asymmetry and ensure that management’s information does not differ from what they provided to other parties. Investors and stakeholders with fair access to clear and accurate information will feel more secure investing in the company. They are reassured that the company is not withholding any important information from them. 

Companies that are not transparent about their financial disclosures through audits risk losing investor trust. This can be seen in the Hyflux and KPMG audit episode. 

Following Hyflux’s liquidation in 2021, Hyflux alleged that KPMG was negligent in auditing its 2011-2017 records. 

KPMG denied the allegations and argued in its defence that the obligation to prepare the financial statements in compliance with the law and reporting standards lies with the plaintiffs’ management and board. 

KPMG maintained that Hyflux Group’s financial statements were audited in accordance with auditing standards, and there were no material misstatements. Auditors also conformed to professional standards when making judgement calls. Any incorrect judgements do not indicate auditor misconduct or negligence. 

Hyflux’s directors were charged with disclosure-related offences in 2022. 

Conclusion 

Financial audits are crucial in promoting transparency in financial disclosures, reducing information asymmetry, and protecting stakeholders’ interests. Companies must adopt transparent financial reporting practices to protect investors’ interests.