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Is a Company’s Financial Statement Reliable?

Before investing in a company, investors need to know more about a company's financial situation. For this reason, publicly traded companies regularly publish financial statements. Such statements are not only for the benefit of prospective investors. They are also meant to inform current shareholders about the state of their investment.

If you are thinking of investing in a company or are already invested in one, you obviously need to know whether or not a company's financial statement is reliable. In other words, can you take the information you find there at face value?

Assessing the Reliability of Financial Statements

There really is no way to ascertain whether or not a financial statement is reliable or not. Generally speaking, however, you can rely on the veracity of a financial statement if it has been vetted and found accurate by an independent auditor.

The Independent Auditor

Publicly traded companies are required by law to have their financial statements checked by an independent auditor. Therefore, after preparing their financial statements, companies pass these on to a certified public accountant for auditing.

The independent auditor's job is to ensure that a company's financial statement complies with GAAP (Generally Accepted Accounting Principles) standards. Armed with the company's records and books, the independent auditor verifies the entries in the financial statement. He or she may also conduct interviews and do everything else necessary to confirm the validity and reliability of the financial statement.

When he or she is done, the independent auditor writes a report that details his or her findings. The independent auditor's report then becomes part of the financial statement filed with the SEC, shown to shareholders or used for any other purpose by the company.

Finding Out Who Audits a Company

To find out who audits a company's financial statements, refer to the company's latest financial statement. You can find the auditor's info in Form 10-K (look for the item entitled "Accountant's Report") of a company's SEC filing.

A publicly traded company's financial statements are accessible to the public. You can obtain a copy of a company's financial statements from the US Securities and Exchange Commission's online database.

Verifying the Auditor's Objectivity

If a financial statement has been audited, you can be fairly certain that you can rely on the information it contains. To be absolutely certain, however, you should also assess the objectivity of the independent auditor who vetted the statement.

Specifically, you should ensure that the auditor is truly independent. Possible conflict of interest may arise if an auditor provides more than just auditing services to a company.

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