Why do investors need to worry about the validity of financial statements?

Question

please explain this

Answer 1

Re-read your question.

Your checking account is a financial statement.

Is it important that your account is accurate. Of course.  

Answer 2

The answer is fairly obvious. Financial statements give insight into how a company is doing, how the company has done and potentially how the company will do. If a financial statement is flawed and invalid, that can lead to investors knowing the wrong stuff about the company. There are several boards and accounting principles that limit the exaggeration a company can do on it's financial statements. One, if I remember correctly, is to always understate the value of something if you do not know it correctly rather than overstating. This ensures that investors and other similar entities are not left without less money than they expected.

I hope I helped.  

Answer 3

That's pretty obvious. If you were making an investment decision or recommending an investment you would want to know that the facts and figures in the figures were accurate.

Answer 4

The value of a company comes from several sources. Two of the important ones are book value (the value of the company's assets - the value of the company's liabilities). If the company's balance sheet overstates the value of assets (like the auction rate securities or subprime mortgage securities) then the company looks like it is worth more than it really is. The same is true in reverse if the understate liabilities.

The other valuation of interest here comes from expected earnings. If the company overstates their current or expected earnings then investors will be likely to pay more for those higher earnings and will feel cheated if the company cannot sustain the level of earnings they've stated. Look at the Enron case for an example of this type of accounting shenanigan.