generally accepted accounting principles GAAP
Question
Financial Statements Question....Please help!!!?
Financial statements are based on generally accepted accounting principles (GAAP) and audited by CPA firm, so do investors need to worry about the validity of those statements? Please explain your answer. Please note: This is NOT a personal finance question of my own...this is a question from my finance class ;) so, in case you are wondering, no I am not looking or trying to invest at this point. I am just sort of stumped and am lost for words, so I am asking for someone's help on this question :) Thanks much everyone, I truly appreciate it and I WILL award 10 points to whom ever can answer this as thoroughly as he/she can.
5 months ago - 1 answers
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The investor shouldn't simply accept the audited financial statements as fact just because they are signed by a CPA Firm. Companies like Enron had their financial statements audited by one of the five biggest accounting firms on the planet and their financial statements turned out to be a complete sham. There will be situations where an unreputable CPA Firm will audit a company's financial statements. There will be situations where a company tricks a reputable CPA Firm by providing them with false information to audit. There will be situations where a CPA Firm interprets a company's financial situation in a manner that is not correct or in a manner where it will not provide sufficient information to the investor. Always keep in mind that the company being audited is paying the CPA Firm to perform the audit, so while the CPA Firm is technically considered an "independent auditor," are they really independent? The bottom line is that investors should use audited financial statements as one means of evaluating whether or not they should invest in a company. Michael T. Hanley, CPA is the Managing Partner of the Smithtown, NY CPA Firm, Merl & Hanley, LLP and the author of Effective Tax Planning for the MicroBusiness.
5 months ago
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