Why is regular review essential when estimates are used in financial reporting?

The importance of regular review in the context of using estimates in financial reporting is primarily to ensure the reliability of the financial statements. Estimates are often based on subjective assumptions and judgments, such as those involving future cash flows, asset valuations, and provisions for liabilities. These judgments can change over time as new information becomes available or as circumstances evolve.

By reviewing estimates regularly, organizations can adjust them to reflect the most accurate and current information, thereby maintaining the integrity and reliability of the financial statements. This practice supports users of financial statements—such as investors, regulators, and management—in making informed decisions based on the most accurate information possible. Regular reviews help to minimize biases and errors in estimation, which is crucial for maintaining stakeholder trust and compliance with accounting standards.

In contrast, assuming estimates are always accurate would lead to potential misrepresentation in financial reporting. Additionally, while estimates are subject to audit, regular reviews are necessary to ensure they are updated and reflect changing conditions. Lastly, it is not true that estimates do not impact earnings; many estimates directly affect reported earnings and overall financial performance, highlighting the need for diligence in their ongoing evaluation.