In the wake of the recent accounting scandals, investors are becoming hypersensitive to the reliability of published accounts and suspicious of the possibility of inflated earnings. The slightest hint of wrongdoing now has the potential to deflate investor confidence and bring share prices down.

In other words, the drive has become more urgent and more desperate as investors steer clear of companies with opaque business reporting systems. Transparency is becoming a matter of survival rather than choice and people are beginning to remember that the rules of financial reporting have never been an exact science immune from interpretation or indeed human error.

Chief executive officers, finance directors and auditors should start to understand that this issue does not just affect their individual operations but capital markets as a whole. If the confidence in markets is missing, capital to finance day-to-day business and longer-term investment funds will be less forthcoming and more expensive as higher rates of return and greater security are sought to offset the perceived risks involved. And that confidence will depend on the quality of reporting by listed companies.

More transparency in financial reporting essentially means that companies would start providing all the information the market considers relevant rather than simply fulfilling their mandatory regulatory requirements. Transparency in this context means that there should be little difference between the performance measures used internally and those reported to external stakeholders - essentially, what is measured internally and reported externally should be the main value drivers of the company.

Risks and barriers to better disclosure
It is important to emphasise that the change does not necessarily have to be a regulatory one. It is about the process of disclosure, about how value is communicated to the market. But, if everyone else is already playing the numbers game, what is the advantage of sticking one's head above the metaphorical parapet? Surely it will not only be costly to gather more information to disclose but companies are potentially risking their commercial sensitivity for little more than a promise of a higher share price. Are you not opening yourself to being taken hostage to fortune, especially when things are going badly? Will the markets, being efficient, eventually correct any anomalies without interventions? Is this not just a huge gamble that only a few companies can afford?

Post-Enron, the obvious reason for reviewing reporting practices is the danger of crossing the line between earnings management and fraud. There are plenty of opportunities for companies to exploit the inherent scope to exercise judgement when deciding on accounting treatments for a particular transaction, some of which could be labelled aggressive earnings management. There is also an increased feeling of insecurity - managers and employees all over the world are scrutinising their own companies' accounting practices. This is especially important in times of economic downturn when more managers are tempted to massage the figures in order to inflate their earnings and meet their targets. Boards of directors need to be more accountable for their figures.

Related to this is the reputational risk that such dubious, albeit legal, practices might carry. If a company's earnings management tactics are uncovered and publicised, investor confidence will disappear overnight and the share price can go into free-fall. We are already beginning to see the same thing happening to companies unwilling to be open with their financial data.

Ironically, in order to limit the exposure to such risk, many companies attempt to restrict or manipulate the amount of information provided. However, the entire information paradigm has changed, mainly thanks to new technology - we expect the information now and, importantly, we expect it for free. If a company fails to provide it, someone else will almost certainly be happy to oblige.

If individual companies are left in charge of choosing what they disclose, the information can suffer from a considerable company bias. Comparing companies will become increasingly difficult as a result, yet the other equally unwelcome extreme is the enforcement of rigid prescriptive rules and a tick-box approach. In fact, comparing like with like is one of the factors in the continuing resiliency of the current system. Guidelines defining terms such as 'research and development' and similar expenditure categories that create long-term value are needed.

In the absence of agreed standards or at least a consensus on the measures used, asking companies to add more detailed information to an already complex reporting system will raise doubts about the comparability and therefore trustworthiness of their published results. In addition, there will be concerns about auditing the information provided in this manner. Building up data on historical trends is not enough - what the market needs is cross-company comparability.

The third objection to transparency is usually related to commercial confidentiality. The complaint is, to a certain extent, unjustified - no company will ever be expected to part with truly sensitive information. However, the definition of what may be commercially sensitive has changed. In today's volatile markets, the more rapidly market conditions change, the more quickly hard-won market intelligence loses its value. And from the company perspective, the faster the pace of change, the faster the decline in the value of maintaining confidentiality of information.

Benefits of increased transparency
For a start, investor confidence will improve with the increase in relevant information. This will in turn lead to more long-term investors. As companies become more open with their strategy, the quality of the management, the value of their assets and the risks they face, they will become a less risky proposition for investors. In this virtuous cycle, they would then have access to cheaper capital. Markets will eventually reward better disclosure and penalise opaque practices.

Despite all the potential benefits, many are still sceptical about the practicality of total transparency. For many companies, especially the first movers, the shift will not be easy. The biggest obstacle is the fear that the companies can end up being held hostage to fortune. In addition, there will be concerns about the reliability of what the companies disclose. As already mentioned, some kind of external verification and/or auditing will be necessary. The cost of providing more information might prove to be a significant barrier, especially for smaller companies. Some may have already developed leading performance indicators for internal use or they may soon be required to do so by either the general trends in the business world or market pressures. Switching to increased disclosure should be the next step. But starting off with a redesign of management accounting information can prove to be a valuable and cost-effective exercise as it will help companies identify the main assets and activities that really drive value in their companies.

Clearly, companies need to make adjustments to deal with sensitive competitive information or unreliable performance measures but these decisions will depend on perceived costs and the benefits of making enhanced information available to investors.

This article is contributed by CIMA (The Chartered Institute of Management Accountants), the leading professional accountancy body in the world that trains and qualifies accountants in business. It offers the internationally recognised CIMA Professional Qualification in Management Accounting. Currently CIMA has 155,000 members and students throughout the world.