The auditor represents the shareholders and it is the auditor’s duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented do in fact present a true and fair view of the state of the company. Investors must remember that the auditors are required by law to point out if the financial statements are true and fair.
They are also required to report any change, such as a change in accounting principles or the non-provision of charges that result in an increase or decrease in profits. It is really the only impartial report that a shareholder or investor receives and this alone should spur one to scrutinize the auditor’s report minutely. Unfortunately, more often than not it is not read.
There can be interesting contradictions. It was stated in the Auditor’s Report of ABC Co. Ltd. for the year 1999-2000 that, “As at the year-end 31st March 2000 the accumulated losses exceed the net worth of the Company and the Company has suffered cash losses in the financial year ended 31st March 2000 as well as in the immediately preceding financial year.
In our opinion, therefore, the Company is a sick industrial company within the meaning of clause (O) of Section 3(1) of the Sick Industrial Companies (Special Provisions) Act 1985”. The Director’s report however stated, “The financial year under review has not been a favourable year for the Company as the computer industry in general continued to be in the grip of recession. High input costs as well as resource constraints hampered operations.
The performance of your Company must be assessed in the light of these factors. During the year manufacturing operations were curtailed to achieve cost effectiveness. Your directors are confident that the efforts for increased business volumes and cost control will yield better results in the current year”. The auditors were of the opinion that the company was sick whereas the directors spoke optimistically of their hope that the future would be better! They could not, being directors, state otherwise.
At times, accounting principles are changed or creative and innovative accounting practices resorted to by some companies in order to show a better result. The effect of these changes is at times not detailed in the notes to the accounts. The Auditor’s Report will always draw the attention of the reader to these changes and the effect that these have on the financial statements. It is for this reason that a careful reading of the Auditor’s Report is not only necessary but mandatory for an investor.
You can read more about director's report here and importance of financial statement here.
They are also required to report any change, such as a change in accounting principles or the non-provision of charges that result in an increase or decrease in profits. It is really the only impartial report that a shareholder or investor receives and this alone should spur one to scrutinize the auditor’s report minutely. Unfortunately, more often than not it is not read.
There can be interesting contradictions. It was stated in the Auditor’s Report of ABC Co. Ltd. for the year 1999-2000 that, “As at the year-end 31st March 2000 the accumulated losses exceed the net worth of the Company and the Company has suffered cash losses in the financial year ended 31st March 2000 as well as in the immediately preceding financial year.
In our opinion, therefore, the Company is a sick industrial company within the meaning of clause (O) of Section 3(1) of the Sick Industrial Companies (Special Provisions) Act 1985”. The Director’s report however stated, “The financial year under review has not been a favourable year for the Company as the computer industry in general continued to be in the grip of recession. High input costs as well as resource constraints hampered operations.
The performance of your Company must be assessed in the light of these factors. During the year manufacturing operations were curtailed to achieve cost effectiveness. Your directors are confident that the efforts for increased business volumes and cost control will yield better results in the current year”. The auditors were of the opinion that the company was sick whereas the directors spoke optimistically of their hope that the future would be better! They could not, being directors, state otherwise.
At times, accounting principles are changed or creative and innovative accounting practices resorted to by some companies in order to show a better result. The effect of these changes is at times not detailed in the notes to the accounts. The Auditor’s Report will always draw the attention of the reader to these changes and the effect that these have on the financial statements. It is for this reason that a careful reading of the Auditor’s Report is not only necessary but mandatory for an investor.
You can read more about director's report here and importance of financial statement here.
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