The financial statements of any firm are prepared based upon the applicable financial standards (like IFRS, GAAP, etc.). These standards give the option of more than one treatment for an item in the financial statements. This gives the management and those charged with governance a lot of scope for manipulation and window dressing, according to their needs. These manipulations hamper the quality of the information available to the analysts.
So before getting down to any sort of conclusion or decision, which is the ultimate aim of the process of analysis, it is extremely important to judge the quality of the financial statements. The analysts need to make sure that the financial statements are free from any sort of bias and errors in judgment by the management.
Also, it is not just the quality of statements that is important; the analyst also needs to be sure about his judgment regarding the quality of financial performance. He needs to make sure that, whether the figures of profitability and growth as reflected through the financial statements are also sustainable in the future or not, or if the loss as reflected in the statements is actually reversible or not. At times certain losses or gains as reflected in the financial statements are only accounting gains or losses; they are not the real economic gains or losses. The actual position of the business can only be analyzed upon the analysis of the quality of financial reporting.