An Example of the Limitations of Audited Financial Statements
By Michael C. Dennis, MBA, CBF
Reliable financial information is essential to credit professionals making
a decision about whether or not to grant trade credit. Unfortunately, in
some cases financial statements can be misleading or even fraudulent. Credit
managers often assume that audited financial statements are accurate. The
Enron bankruptcy is another in a long list of examples proving that audited
financialstatements are not always accurate.
Some credit managers consider an unqualified opinion letter issued
by a company's independent auditor as a "clean bill of financial health" for
their client company. In reality, an unqualified opinion means that
the independent auditors noted no significant variations from generally
accepted accounting principles (GAAP) during their audit. What the
Enron case demonstrates is that audits are sometimes not as comprehensive
as they should be and important information can be overlooked. The
role of the independent auditor is to examine the books and records
of their client, not to dissect them and not to create them.
In the Enron case, it seems that Enron's independent auditors missed
certain financial irregularities. When these irregularities came to
light, the value of the stock of the corporation went into virtual
freefall, and soon afterward Enron filed for bankruptcy protection.
The lessons credit professionals can take from this situation include
Audited financial statements do not always mean
the company is creditworthy.
The fact that a company is publicly traded is not
a guarantee of creditworthiness.
Financial irregularities can occur with audited
If financial irregularities can occur with audited
statements, imagine what risks you take when reviewing customers'
unaudited statements, or compilations, or internally prepared statements,
or fragmentary statements, or financial "highlights".
Read the footnotes to look for off balance sheet
financing [not that it would have helped in the Enron case to my
So-called financial experts and rating services
and credit bureaus are not always correct in their evaluation of
If a customer's financial condition looks too good
to be true, it may be too good to be true.