1.11 Conclusion

Users of financial statements demand and expect high quality financial information, which they rely upon when making investment and other resource allocation decisions. Because of information asymmetry inherent in the principal-agent relationship and the presence of both intentional and unintentional misstatements, investors charge risk premiums or refuse to invest in clients with high levels of information risk. In order to reduce information risk and mitigate the negative effects of information asymmetry, capital market participants seek out reputable auditors to provide assurance regarding the reliability of reported information. As information risk is minimized, the perceived quality of information increases, and investors become more willing to invest in those companies whose financial reports are accompanied by clean or unqualified audit opinions. Thus, companies can reduce the costs of obtaining capital from third parties by paying to have a quality audit performed each year. Auditors’ opinions can be relied upon to a greater extent as they perform higher quality audits. Quality involves a range of factors from competence, experience, expertise, objectivity, and understanding their role. Audited information benefits both the users of the financial statements and the reporting company by reducing the risk premium charged by investors or creditors.

Notes