External auditors are technical experts that can mitigate this information risk by investigating the financial statements of a company and the underlying transactions, and attesting to whether the financial information that management provides is reliable or not. Company management may have incentives and opportunities to “lie” about the true economic condition of the firm, and to provide financial information that is distorted. Moreover, even if they have so, they do not have access to the inside information that corroborates the financial statement information. Many stakeholders do not have financial and accounting skills to judge whether the information that management provides is reliable.
It is the management of the company that prepares the company’s financial statements.
This information can be used by shareholders and other stakeholders for decision making-for example, to decide whether to buy or sell shares in the company, or whether a loan should be granted or extended to the firm. External (financial statement) auditors provide assurance about the reliability of the financial information that companies issue.