Hi, welcome back auditing learners.
We've looked at an abstract market, and I think there's some value there, you start seeing,
structurally, how product markets can be enhanced by audit verification services.
I want you to think about this now, a little bit more
deeply, for financial statement auditing.
And first of all, I want you to think about the following.
In a financial statement auditing market,
in some sense, the product that is being sold is the capacity to
contract with the firm whose financial statements are being audited.
So, people are trying to engage in contracting behaviors with John Deere, with Boeing,
Weyerhaeuser, UPS, any of the...State Farm, you know.
Pick your favorite company to think about, and those companies have financial statements.
The financial statements is not the only, by any stretch,
information source, but it's a huge information source
of both backward-looking and very forward-looking information.
One of the worst things you can believe, and I see it all the
time, is people say that financial statements are backward looking.
Look, there's certainly an element of truth to that.
But financial statements have so many forward-looking estimates,
that they are reporting not only on current performance,
but they actually help you forecast future performance.
And if you take a course in financial statement analysis,
you will see more about what I mean.
But, let's just boil it down to something simple.
Let's suppose that you just are an investor who's
thinking about buying stock in a company.
Basically, the financial statements are a way for you to estimate
the value of that company's stock
in conjunction with other information that you can get in the market.
The more attractive those financial statements make
the company's stock look, and the more believable those financial statements are,
people are going to pay a higher price...for the stock, for that company, right.
So, if Starbucks earnings looked to be of a higher quality, and
its balance sheet looks stronger, and its future liabilities that
could emerge as a result of challenges to their technology, or as
maybe lawsuits about labor, or lawsuits
about the way they have sometimes allegedly treated customers.
In the current news, as it turns out, Starbucks is engaging in a clarification
about how they're going to treat customers who are
in the building, who've not yet bought anything.
And there was an incident, not to overly date the video,
but there was an incident in Philadelphia, I believe, that was the most unfortunate one.
And had all these things with smacks of complete racism,
and it's not in anyone's interest, and
certainly not in the interest of shareholders, you know, of Starbucks.
And even setting aside the pure monetary side,
there's some social ills there that you don't want
to be associated with the company, if you're Starbucks.
So, you have these audited financial statements and you're wanting to
know is this, abstractly, a lower grade company,
a medium grade company, or higher grade company in terms of an investment.
And that's where the financial statement auditor comes in.
The auditor is a little different.
They don't say that, we think this is
a higher grade company or a lower grade company or minimum grade company.
The auditor's don't say, we think the stock price should be $60 per
share instead of 57, or whatever your company is trading at.
I think that's near in the neighborhood of what
Starbucks is trading at today around 56, $57.
No, what the auditor is saying is that the financial statements represent
fairly, in all material respects, the financial results of performance of an organization.
Mark E. Peecher, PhD, CPAAssociate Dean of Faculty and Deloitte Professor of Accountancy
