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Discussion #2

Investors should remain cautious about the validity of financial statements, even when they adhere to GAAP and are audited by CPA firms, as management may manipulate figures and audits have inherent limitations. Auditors rely on sampling and company-provided information, which can lead to undetected errors, and investors must conduct thorough due diligence to assess the integrity of financial data. Ultimately, a skeptical approach and independent analysis are essential for investors to mitigate risks associated with financial reporting.

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20 views5 pages

Discussion #2

Investors should remain cautious about the validity of financial statements, even when they adhere to GAAP and are audited by CPA firms, as management may manipulate figures and audits have inherent limitations. Auditors rely on sampling and company-provided information, which can lead to undetected errors, and investors must conduct thorough due diligence to assess the integrity of financial data. Ultimately, a skeptical approach and independent analysis are essential for investors to mitigate risks associated with financial reporting.

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segoviadelhoyos
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© © All Rights Reserved
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Discussion #2 – Sandra Segovia del Hoyo

Financial statements are based on generally accepted accounting principles


(GAAP) and are audited by CPA firms. Do investors need to worry about the
validity of those statements?

Even though financial statements are prepared in accordance with Generally


Accepted Accounting Principles (GAAP) and are audited by Certified Public
Accounting (CPA) companies, investors should nevertheless pay close attention to
their veracity. Although GAAP and audits offer a solid foundation for financial
reporting, there are still things to take into account to guarantee the integrity and
dependability of the data.

First and foremost, it's critical to understand that management of the company
prepares financial statements. Despite reviewing and verifying the data, auditors
may miss certain possible problems. Management occasionally engages in
purposeful or unintentional manipulation of the numbers within the bounds of GAAP,
which can skew the true financial picture. Investors should evaluate the company's
accounting practices and any unique or opportunistic accounting decisions critically.

Secondly, audits are not foolproof. Auditors use sampling techniques, which means
they examine a portion of a company's transactions and records, not every single
one. This inherent sampling risk means that errors or irregularities may go
undetected. Additionally, auditors rely on the information provided by the company,
so if management is dishonest or conceals information, it can compromise the audit
process. Investors should also be aware of the timing of audits. Financial statements
are typically audited annually, which means there could be a significant gap
between the reporting date and the audit report issuance date. Events occurring
after the reporting date may not be reflected in the financial statements.

Investors should do in-depth due diligence to allay these worries. This entails
examining the company's financial statements over time, contrasting them with
industry standards, and evaluating the management's openness and integrity. To
spread risk, it is wise to diversify your investments.

In conclusion, investors should exercise vigilance and perform their own analysis to
verify the accuracy of financial statements even though GAAP and audits offer some
confidence. Without doing a rigorous examination, relying exclusively on these
assertions can subject investors to unanticipated risks. For any investor, knowledge
of the financial world and skepticism are essential tools.

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https://www.eidebailly.com/insights/videos/audits-understanding-the-difference

REPLIES(2):

Hello, Alex I hope you're enjoying your weekend.

You did a wonderful job of giving us a quick rundown of the Generally


Accepted Accounting Principles (GAAP) and its significance in financial
management, in my opinion. In keeping with this, I think your work
provides a strong basis by explaining GAAP and highlighting the
importance of it for investors. It properly emphasizes that publicly owned
companies in the US must stick to GAAP principles when releasing
financial results, promoting financial reporting transparency.

Nevertheless, I would have provided a more thorough description of what


GAAP involves if I were you. GAAP is a comprehensive framework for
accounting principles, processes, and reporting practices, not just a set of
standards.

Furthermore, in my humble opinion, the wording clearly states that while


GAAP offers a level of comparability and uniformity among financial
statements, it fails to guarantee absolute accuracy. Your idea regarding
industry-specific best practices it's an important contribution, however it
could be developed. A more complete explanation would include
mentioning that some industries have special accounting requirements,
such as International Financial Reporting Standards (IFRS) for
international corporations.

The necessity of investor due diligence, including investigating a


company's accounting principles and practices before making investment
decisions, should be emphasized in your text's conclusion, in my opinion,
as it would make it even better.

Hola Josep, espere que hagues tingut un cap de setmana boníssim!


You did a great job, in my humble opinion, because your essay contains
insightful information about the factors that investors should take into
account while evaluating financial statements and the auditing procedure.
Additionally, it emphasizes the importance of caution and skepticism, two
qualities that are crucial for any investor in today's complex financial
environment.

The independence of the auditor should be mentioned first. I very much


agree with the fact that for financial reporting to be accurate, auditor
independence is essential. The veracity of financial accounts can be put at
risk by conflicts of interest or weakened independence. To make sure the
audit process is impartial, investors need to look into this issue carefully.

Second, the wording emphasizes, thoroughly, that not all CPA companies
are created equal. Investors should take into account the reputation and
track record of the auditing firm because the quality of an audit can vary
greatly between firms. This emphasizes the importance of conducting
careful due diligence.

The text also effectively emphasizes the audits' fundamental limits.


Investors should be aware that audits only offer a fair level of assurance;
they cannot guarantee anything. Risk can be introduced by sampling
transactions and relying on management claims. Making wise financial
selections requires being aware of this constraint.

Moreover, I consider It is important to talk about how accounting rules are


changing. Financial statements may be impacted by changes in
accounting rules throughout time. This makes it more difficult to compare
changes across time, which calls for a deeper comprehension of these
developments.

Companies can pay their shareholders dividends in the form of extra shares of stock
rather than cash by issuing stock dividends. Companies usually utilize this strategy to
pay out earnings to shareholders while setting aside funds for other investments or
running expenses. Stock dividends include benefits and drawbacks, just like any other
financial choice.

Pros:

1. Cash Conservation: One of the main advantages of stock dividends is that they let
businesses compensate shareholders without using up all of their cash on hand. This is
especially advantageous when a business want to hold onto funds for strategic
initiatives or during unpredictable economic times.

2. Confidence Signal: Businesses that are confident in their potential for future growth
frequently distribute stock dividends. Investors may see the issuance of more shares as
a sign that management is confident in the company's potential to make profits in the
future.

3. Tax Efficiency for Shareholders: Dividends on stocks may provide tax benefits to
stockholders. Shareholders may postpone paying taxes on the stock dividends' value
until they sell the extra shares in some jurisdictions.

Cons:

1. Dilution: Dilution is one of the main negative effects of stock dividends. Existing
shareholders' ownership stake decreases when a corporation issues new shares. This
may result in fewer earnings per share and, as a result, lower share valuations.

2. Choice Restriction: Dividends from stocks may provide investors fewer options. To
meet their liquidity needs or to reinvest in other prospects, some shareholders would
choose cash dividends. Stock dividends provide investors more shares, which limits their
ability to manage their portfolios with as much flexibility.

3. Perception by the Market: A company's stock dividends may be seen by the market as
an indication that it cannot produce enough cash flow or that there are better
investment alternatives available. The stock price may drop as a result of this
perception.

To sum up, stock dividends have advantages like cash conservation and confidence
signaling, but they also have disadvantages like dilution, limited investor choice, and
perhaps unfavorable market perceptions. When choosing whether to pay stock
dividends, companies must carefully analyze these variables as well as the demands and
desires of its shareholder base.

References:

- Fuscaldo, D. (n.d.). 3 Tax Implications of Dividend Stocks. Investopedia.


https://www.investopedia.com/articles/investing/030416/3-tax-implications-
dividend-stocks.asp ‌
- Stock Dividend. (n.d.). Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/equities/stock-dividend/ ‌

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