Final answer:
There is a demand for independent auditors to ensure that financial statements are accurate and unbiased, due to potential conflicts of interest between company management and stakeholders. Independent audits are a key element of corporate governance, aimed at promoting transparency and trust in financial reporting.
Step-by-step explanation:
The fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements is B. Different interests may exist between the company preparing the statements and the parties using the statements. This is essential to ensure the integrity and reliability of financial information presented to shareholders, regulators, and the public. When there is a misalignment of interests between those who manage a company and those who provide the capital or rely on the financial statements, there is a risk that the financial information may be biased or manipulated to serve the interests of the managers rather than the shareholders or other stakeholders.
The need for independent audits stems from potential conflicts of interest and the necessity of trust in financial reporting. In cases like Lehman Brothers, the failure of corporate governance highlighted the importance of accurate, unbiased financial reporting, which independent auditors are hired to secure. Auditing firms serve as a critical component of corporate governance, complementing the roles of the board of directors and large investors, by providing an objective assessment of the company's financial position and performance.
This system of checks and balances is designed to prevent management fraud, identify misstatements, and ensure that internal controls are effective. Independent auditors serve to validate that the financial statements faithfully represent the company's financial status and that they are free from material misstatement, whether due to fraud or error.