The work that accountants and auditors do requires a high level of ethics. Why? Because shareholders, potential shareholders, and other users of the financial statements rely heavily on the yearly financial statements of a company as they can use this information to make an informed decision about whether to investment in it, to add more funds to an existing investment, or to sell off an investment. The financial statements are pretty much the main source of information which they can refer to, when performing financial statement analysis.
These financial statements users rely on the opinion of the:
1. accountants who prepared the statements
2. auditors that verified them, to present a true and fair view of the company.
This puts the accountants and auditors in a pretty powerful position, doesn’t it? Accountants can lie when preparing the accounts - say by making the revenue higher and the costs lower than they should be, causing the overall profit to be higher than it should be. For a listed company, healthy earnings, on an uptrend, is a major factor which determines the company’s share/stock price.
And what about the auditors? These are licensed professionals who check and verify the accounts presented by the accountants. They go through the accounts and the relevant evidence (which can be in the form of physical items, documents and oral evidence). Auditors will perform different types of tests before concluding whether a set of financial statements are true and fair.
For more about the work of an auditor, check out [Auditing].
Now, auditors are skilled professionals but that doesn’t imply that they will not:
1. lie or misrepresent the truth (i.e. conclude that financial statements are true and fair when in fact they are not)
2. be careless (i.e. miss out on errors, fraudulent transactions, etc)
There have been many cases (see below) whereby auditors have failed in their duty, causing the great financial loss for investors.
From the 1980s to the present there have been multiple accounting scandals that were widely reported on by the media and resulted in fraud charges, bankruptcy protection requests, and the closure of companies and accounting firms. These were the result of creative accounting, misleading financial analysis, as well as bribery.
We’ll be covering various scandals – click through the following links
for the details (more to come later - stay tuned!).