Dear Business Friends:

I will be mingling small business chats with items that are important to small businesses today.

Gerry

Today topic is: Transparency in Accounting

Transparency. We hear about it at work, in the stock market, in baseball little league. What is all the fuss about? Why is it so important?

It’s a word that means exactly what it says. Transparency means seeing clearly, being open, hiding nothing. We all understand that. So what is it about transparency that makes it so difficult to achieve in accounting?

Truth is, corporations have been hiding things from owners, shareholders, and third-party users for so long that they are having a hard time changing their habits. It’s a lot like giving up smoking—you know you should, it makes logical and intellectual sense, but it is just so hard to stop doing it.

It is essential for corporations and non-profits to practice and question themselves about transparency. All financial documents must clearly state how money comes in and is used—especially when there are multiple products and/or programs.

Here is an example of not being transparent:  an old-fashioned habit to expense items when money remains in the budget. Money is needed for heating repairs, even though there aren’t enough funds left in repairs and maintenance. But there are funds left in store supplies—so heating repairs are posted to store supplies. This is not transparency.  I find that when anyone, profit or non-profit, moves money around to fool others, they only end up fooling themselves by making erroneous decisions based on faulty information.

To encourage transparency, third-party users must start asking questions. That is how Enron started to crumble—the numbers didn’t make sense, and people started asking questions. If you own stock, or are on a local non-profit board, ask questions.

Where do you begin? Make sure the financials you are given are current and complete. One way unscrupulous accountants try to get away with hiding things is by giving as little information as possible, so “the board” doesn’t have enough information to ask intelligent questions. Demand income and expenses be reported separately by manufacturing department or program. Information can still be manipulated, but now at least you can ask questions like, “Why was the all-star baseball team income so low when the stands were crowded with paying customers?”

Another safeguard is to rotate your treasurer. True, no one wants the job and you’re just happy someone is doing it. Regardless, put it in your bylaws that the treasurer must be changed every two years—thereby limiting your risk.