Question

Hi Max. I appreciate you sharing those research findings with the class! Let’s take a closer look at the element of risk assessment. Risk assessment is important for management, the auditors, as well as other external financial statement users. To adequately assess risks, we have to understand the balances on the financial statements as well as the underlying circumstances. If things are omitted, then it’s difficult to reach a reasonable conclusion. Class, what is a joint venture? What sort of additional risks do external users face when a company engages in joint venture transactions?

Answer 1

A joint venture refers to that commercial enterprise that is undertaken jointly by two parties or more than two parties. In a joint venture the parties to the venture pool their resources for a particular business purpose or a particular business objective.

The additional risks that external users face when a company engages in joint venture transactions arises from the very nature of a joint venture. In joint ventures contribution can be in the form of money or in kind. Risks to external users arise due to conditional precedence, warranties, and representations. Joint ventures are not always permanent in nature (unlike a corporation) and hence the external users are more prone and susceptible to misrepresentation and fraud. For instance under the equity method the balance sheet and the income statement gets shrunk on an effective basis mainly due to netting that happens when the equity method is applied. This may lead to important information getting lost. Thus the users may be deprived of relevant and transparent information and this is one of the most prominent risks that they face.