|
CPA here. The short answer is theoretically, yes, but in practice, it's not always practical to have transparent financial reporting. For context, financial reporting is a tradeoff between cost and effectiveness. Whenever you're reading audited financial statements, you're reading an accounting professional's opinion which would be reasonable given a certain level of constraints. In theory, auditors could audit every facet of an organization and obtain 99.99% assurance, but the financial cost of doing so typically doesn't make sense for the company nor shareholders. Of the reduced disclosures, the most significant is not having their internal controls audited. For a big company, this is a red flag because the financial accounts are only reasonable if you also have reasonable assurance that there are controls in place to prevent fraud and that they're working effectively. But for smaller companies where most of the ownership is usually owned by founder-workers, employees, or early investors who are monitoring it on the ground level, there aren't many benefits from increased reporting over internal controls because if they are committing fraud, they'd mostly be defrauding themselves! That, combined with the fact that most early stage companies are already resource-constrained, makes regulators a bit more lenient because they assume investors/employees know what they're getting themselves into. Now, when a company decides to go public, they need some time to adopt best practices and comply with broader regulations. That takes time, so regulators give them a few years to get the personnel and processes in place without penalizing them. But to cover their bases, they're required to make disclosures like above, so that early investors buying into the IPO know that they won't have similar levels of assurance about the financials for a few years. |