Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms....

Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements?

Expert Solution

It is correct that Financial Statements are based on GAAP and are audited by a CPA, and in most of the cases are supposed to be free from any wrongful reporting and in conformity with all aspects. BUT, YES, Investors do need to worry about the validity of those statements.

First of all, may sectors like real estate and some funds are not reported correctly. There are instances where the CPA firm may not have derived an adequate sample of data for audit if the corporation is too large, and may have overlooked some area of reporting transactions. There can be instances that some of the transaction may not have been reported to the CPA at all, he might miss out on that.

On the other hand, as we have seen in many cases like Enron in US and Satyam in India, wherein the accounting firm was found to be 'hand-n-glove' with the company in reporting wrong and inflated financials. There have also been instances that the method of reporting by CPA firm is such that important details may get missed out by the Investors. They tend to report some important information in form of fine print to escape the attention of investors.

Thus, due to all factors mentioned herein, YES... Investors do need to worry about validity of financial statements

jeff jeffy answered 1 year ago

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