Published financial statements, including audited financials statements, have a number of weaknesses. Some of the limitations of financial statements and financial statement analysis include:
Past financial performance, good or bad, is not an indicator of future performance.
Unaudited published financial statements may contain either or both of these two types of errors: (1) unintentional mistakes, or (2) intentional misrepresentations.
Unless a customer provides prior period financial statements for comparison, there is no starting point for comparison.
Explanatory notes to the financial statements contain new information but many recipients do not take the time to read and understand these notes.
Fixed assets are shown on the balance sheet at their acquisition cost minus accumulated depreciation. The fair market value of these assets is always different from the book value.
Published financial offer no insight about anticipated changes in demand, competitive challenges, or management changes at the company under financial review
Published, audited financial statements can be changed legally by adjusting certain reserves.
In the short term, a company's financial results can be improved by reducing or eliminating discretionary expenditures รป even if the decision affect the company's long term success
It is not enough to know a customer's financial weaknesses by analyzing published financial statements. It is also essential to know whether a customer's financial performance is [a] weak but improving or [b] weak and deteriorating, or [c] weak with no significant improvement or deterioration detected.
Published audited financial statements are not a guarantee of accuracy.
The fact that a company's stock is publicly traded and its financial statements are readily available does not guarantee that the company is financially stable
Auditors may be required to add cautionary notes to a client company'...