Accounting For Dummies®, 4th Edition

13.6. Checking for Ominous Skies in the Auditor's Report

The value of analyzing a financial report depends on the accuracy of the report's numbers. Understandably, top management wants to present the best possible picture of the business in its financial report. The managers have a vested interest in the profit performance and financial condition of the business; their yearly bonuses usually depend on recorded profit, for instance. As I mention several times in this book, the top managers and their accountants prepare the financial statements of the business and write the footnotes. This situation is somewhat like the batter in a baseball game calling the strikes and balls. Where's the umpire?

NOTE

Independent CPA auditors are like umpires in the financial reporting game. The CPA comes in, does an audit of the business's accounting system and methods, and gives a report that is attached to the company's financial statements. Publicly owned businesses are required to have their annual financial reports audited by independent CPA firms, and many privately owned businesses have audits done, too, because they know that an audit report adds credibility to the financial report.

What if a private business's financial report doesn't include an audit report? Well, you have to trust that the business prepared accurate financial statements following authoritative accounting and financial reporting standards and that the footnotes to the financial statements cover all important points and ...