The purpose of financial statements is to enable managers, shareholders and potential investors the insight into the information base they need to determine the financial health of a company. For many companies, the preparation of financial statements is a matter of legality. On the other hand, financial statements are useful only if they are accurate. This is the reason organizations often hire external auditors to observe the accuracy and quality of their financial statements. In addition, is not unlikely that government agencies oblige businesses to provide audited statements when they trade their stock.
Accuracy = Insurance for Investors
Third-party auditors inspect the accounting procedures that a company uses to record transactions and invoices that were used to prepare a financial statement. Let’s say that a balance sheet reports $100,000 in assets. An auditor will check the accuracy of that figure by tracking the receipts and invoices on file, eliminating eventual entry errors. In this way, investors and stockholders know what stocks to trade or where to invest, as they know that the financial statements mirror the real financial situation of the company.
Eliminate Information Asymmetry
If a business reports fake financial statements, to the effect that shareholders and investors are presented with the information different from those available to the company’s management, that situation is called information asymmetry. Half legal businesses often use two sets of accounts, those they use to run the company and those they report to federal or state agencies and potential investors. But, if an independent audit company is employed, they will check the financial statements and be able to spot irregularities in accounting methods, a red flag that financial statements are tampered with.
Another advantage of external auditors is that they are not only looking for accuracy consistency in financial statements but also make sure that the financial statements are compiled in accordance with national and international accounting standards. This is the crucial element of multinational corporations that are obliged to adhere to different accounting procedures. In additions, audited financial reports are checked for consistency as well in order to determine if the accounting procedures and figures employed within a company are consistent with regular and uniform reporting methods.
The reliability of your financial statements is augmented even if an auditor fails to find any inconsistencies in them, because they are audited by an independent party. It is not uncommon that a lender requires audited financial statements from a potential borrower, because they want a third-party auditor to stand behind the borrower’s financial situation. Finally, a company’s management may also take advantage of an independent audit, as it is able to alert them to corrupt employees who embezzle company assets and try to hide behind false invoices and transactions.
Third-party audits have many advantages for both company and potential investors. They eliminate the information concealment, minimize the entry-level errors and ensure that official accounting procedures are followed throughout the fiscal year. What is more, they serve as a reliable proof to stockholders and investors of a business financial statements’ legality.