The Need for Audited Financial Statements Why do financial statement users need independent assurance about information provided by management?

Answer 1

The need for independent assurance arises from several factors:
* Potential bias —Management has incentives to bias financial information in order to convey a better impression of the financial data than real circumstances might merit. For example, management? 's compensation may be tied to profitability or stock price, so managers may be tempted to "bend" GAAP to make the organization 's performance look better.
* Remoteness —An organization and the users of its financial information are often remote from each other, both in terms of geographic distance and the extent of information available to the both parties. Most users cannot interview management, tour a company 's plant, or review its financial records firsthand; instead, they must rely on financial statements to communicate the results of management's performance. This can tempt management to keep information from users or bend GAAP so the organization looks better.
*Complexity —Transactions, information, and processing systems are often very complex, so it can be difficult to determine their proper presentation. This provides an opportunity for management to deceive users.
* Consequences —During the past decade, many financial statement users —pension funds, private investors, venture capitalists, and banks —lost billions of dollars because financial information had become unreliable. As an example, the factors leading up to, and the consequences of, unreliable
information can be seen in the sub-prime mortgage crisis in the United States. Many borrowers did not provide correct information on their loan applications and lenders sometimes did not perform adequate due diligence in making lending decisions. Consequently, various financial statement users and others suffered significant losses. When financial information is not reliable, investors and other users lose a significant source of information that they need to make decisions that have important consequences.