You recently overheard the following conversation between two auditors:

Auditor 1: “It’s impossible to know the needs of all the users of a company’s financial statements. For example, how—or even why—should I know how a labor union ora bank might use the financial statements of a company I am auditing?”

Auditor 2: “You have to know the needs of those users; otherwise, you can’t determine whether the accounting for a particular transaction might be material to the user.”

Auditor 1: “Well, I can’t know them all, so I'll concentrate on shareholders and bank lending officers. They’re the most important. Besides, management ultimately makes the decision as to what constitutes fair presentation. I’m dealing with their financial statements, not mine. You sometimes just expect too much from us as auditors.”

Auditor 2: “It’s the public that expects too much. I don’t want to be called into court for not meeting user needs. But, I do agree with you; it’s certainly difficult to understand all the diverse user needs. Besides, each group seems to want different things, and you can’t meet them all. If profits are high, labor wants more wages, and the taxing authorities want more taxes. And management wants to keep reported profits down. I guess we just have to rely on GAAP and if it follows GAAP, we can assume it meets user needs.”

Auditor I:“Now you have finally said something I can agree with. Let’s go have lunch.”

Discussion Issues:

a. Why is it important that auditors understand the diverse groups that may use the auditor’s report, as well as each group’s needs?

b. Critique the conclusion of Auditor 2 that because it is impossible to know all user needs, the only solution is to rely on GAAP for fair presentation.

c. Consider the five following groups, and indicate how each group’s needs for information might create potential conflicts with the needs of the others:

1. Existing shareholders 

2. Potential investors 

3. The company’s labor union 

4. A bank lending officer 

5. Company management