TDR University – Only 25% of earning reports have audits!

The TDR Three Key Takeaways:

1. Quarterly vs. Annual Audits: Only 25% of earnings reports, specifically the annual financial statements, undergo an audit, contrasting with the unaudited nature of quarterly reports. This distinction is crucial for investors understanding the level of scrutiny applied to financial data throughout the year.
2. Importance of Audits: The case of iAnthus Capital Holdings, Inc. underscores the critical role of annual audits in ensuring financial statement accuracy and regulatory compliance, highlighting how audits can reveal significant discrepancies that necessitate restating financial results.
3. Investor Caution Advised: Investors should approach quarterly financial reports without audits with caution, recognizing their limitations and the potential for material misstatements that can only be fully vetted through the annual audit process.

For investors, the reliability and accuracy of a company’s financial statements are paramount. Investors and stakeholders rely on these documents to make informed decisions, trusting that the figures presented reflect the true financial health of a business. However, it’s crucial to understand that the process of financial reporting involves several stages, including quarterly reports and the annual audits. The distinction between these stages is significant, as it highlights the varying levels of scrutiny and verification financial statements undergo throughout the fiscal year.

All public companies release earnings reports quarterly. These reports provide a snapshot of the company’s financial performance, including revenue, expenses, and profit margins. However, it’s important to note that these quarterly reports are not audits. Audits, a comprehensive examination conducted by an independent firm, occurs once a year and scrutinizes the company’s financial records and practices thoroughly. This process ensures the financial statements’ accuracy and compliance with accounting standards and regulations.

The distinction between quarterly reports without audits and the annual audits of financial statements became starkly evident in the case of iAnthus Capital Holdings this week. The company disclosed that, during the preparation of its consolidated financial statements for the fiscal year ended December 31, 2023, management identified a significant error. This error, stemming from an intercompany consolidation and the valuation of inventory, led to an overstatement of inventory in its unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2023. Such discrepancies highlight the potential pitfalls of unaudited reports and underscore the importance of the annual audit in identifying and correcting inaccuracies.

Upon discovering these errors, the Audits Committee of iAnthus’ Board of Directors, after consultations with management and advisors, concluded that the financial statements for the third quarter of 2023 were materially misstated. Consequently, the company announced that these interim financial statements and the accompanying earnings release should no longer be relied upon. iAnthus plans to issue restated financial statements for the affected periods, reflecting the necessary corrections. This situation illustrates the critical role of the audit process in maintaining the integrity and reliability of financial reporting.

For investors, the iAnthus case serves as a potent reminder of the inherent limitations of financial reports that are not audits. While these documents offer valuable insights into a company’s quarterly performance, they do not undergo the same rigorous verification as the annual audited statements. The audit’s findings, especially when they necessitate a restatement of financial results, can significantly impact a company’s perceived financial health and investor confidence. This scenario underscores the need for investors to approach unaudited reports with caution, understanding that only the annual audit provides a fully vetted and reliable picture of a company’s financial standing.

In conclusion, the process of financial reporting, with its distinction between quarterly and annual statements with audits, plays a crucial role in corporate transparency and accountability. The annual audit, in particular, ensures that financial statements are accurate, reliable, and in compliance with regulatory standards. The experience of iAnthus Capital Holdings, Inc. with its financial restatement highlights the complexities and challenges of financial reporting, reminding stakeholders of the critical importance of auditing of financial statements. Want to keep up to date with all of TDR’s research, subscribe to our daily Baked In newsletter.