Question

Which of the following best describes the primary reason an independent auditor reports on financial statements?

1) To give stockholders some assurance that any fraudulent activities will be detected.
2) To identify a poorly designed internal control structure that may produce unreliable financial statements.
3) To provide expertise to management, which may not be totally knowledgeable of prevailing GAAP.
4) To add credibility, where appropriate, since management may not be perceived as objective with respect to its own financial statements.

Answer 1

The main reason an independent auditor reports on financial statements is to enhance their credibility by providing an objective assessment that ensures statements are truthful and comply with GAAP. This is vital for corporate governance and maintaining investor trust, particularly after the enactment of the Sarbanes-Oxley Act in the wake of major accounting scandals.

Step-by-step explanation:

The primary reason an independent auditor reports on financial statements is to add credibility to those financial statements. Auditors are external experts who operate independently from the company's management, providing an unbiased examination of the company's financial records. Their role is to ensure that the financial statements accurately reflect the company's financial position and are in accordance with generally accepted accounting principles (GAAP).

Corporate governance is a key aspect of maintaining the trust of investors and the public. The auditing firm plays a crucial role in corporate governance by reviewing and certifying the company's financial statements. This is particularly important given historical failures in corporate governance, such as the bankruptcy of Lehman Brothers, which can undermine investor confidence.

The auditing process is critical, especially after accounting scandals like those involving Enron and WorldCom, which led to legislations like the Sarbanes-Oxley Act. The act aims to protect investors from accounting fraud by increasing confidence in the financial information publicly reported by corporations.