Crazy Eddie focused on making the company look extremely profitable just prior to the IPO. Why...

Crazy Eddie focused on making the company look extremely profitable just prior to the IPO. Why was this important? Does this make a client that is in the process of issuing an IPO a higher risk client? Why or why not? Are there other risks to the auditor when an IPO is included in the engagement?

Expert Solution

IPO or Initial Public Offering is the process by which a company goes public for the first time. The company does so to raise money from the public in order to use the money for their growth and expansion. This is done by the firm issuing shares to the public. The public will buy the shares of the company and have some ownership rights over the company. They will also receive dividends on the shares that they hold. Moreover, the shares of the company can be bought and sold in the share market and the company can make money. However, all this is possible when the company is able to have a successful IPO. In order to make the IPO successful, the investment banker will try to show that the company is profit making firm. By doing this the company’s IPO will sell more as people will believe that they will earn more profits in future by investing in the company.

Regarding risk, it can only be said that the company will have no risk in showing that it is a profitable company buy the risk is more for the buyers of the IPO. The risk is that they may not earn the profits that they are expecting.

The risk for the auditor will be if the company does not perform well in the market. It may affect the reputation of the auditor that the profits of the company were fabricated before the issue of IPO.

jeff jeffy answered 2 years ago

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