It seems to be a cyclical situation regarding transparency and financial quality issues, since after every economic bubble an unusually high number of firms appears to have commit irregularities in the presentation of their financial statements, after that scenario emerges many authorities at different levels of government (and professional bodies) propose new legislations, recommendations and higher standards to help reduce the “fog” in the financial statements and increase their quality and transparency. It´s possible that some of those usually suggested measures (limiting the duration of auditing tenures) is not really helpful, but it could be event harmful for the proposed purposes. In addition to regulations, it´s also helpful to identify the usual situations and conditions where reporting quality diminishes, since in that way auditors (internal and external) can be in an increased alert state, when those conditions arose.
Brief Revision of Literature
According to English (1999) there are two definitions of Information Quality (that can also apply to financial information), they are inherent quality that is the understood as the accuracy of the data, the other definition is the pragmatic quality, in this case, what matters is the usefulness of the data, because if some data is useless, it doesn´t have pragmatic quality, in our case, it would mean that that financial data released by the company would be of no help to an auditor or investor to evaluate the financial situation of a firm.
Transparency in financial information is understood as high precision about reported firm earnings (Sadka, 2011), in the same paper is proposed that information quality could reduce liquidity beta, which in turn will reduce risk...
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...hat the financial statements were not right, it was that sales growth in an astronomical way, but profits remaining at the same low levels as before. That could be a red flag to detect that something is not right about a company reported revenues.
We have seen that we can only consider that financial reports are of high quality if they help investors to adequately evaluate the risks of an investment, we should also be aware that there are many ways that firms can hide their bad results, so it´s also necessary that investors and auditors check for red flags like over complex structures or deals, and be more aware than normal when we approach an end of business cycle period since lower quality standards are applied there. In addition we can say that there are no easy solutions, since “common sense” measures like mandatory auditor rotation can be harmful.
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