Definition: An external user is a person outside of an organization who does not directly run its operations and uses financial or accounting information about that company to make decisions. In other words, it’s someone who doesn’t manage or work for a company but uses its financial information.
What Does External User Mean?
External users are the focus of accounting. The entire purpose of financial accounting is to record business events and communicate them with external users in a meaningful way. Since external users have no first hand knowledge of a company’s financial position or plans for the future, they are dependent on the financial information that is provided to them by the company.
Example
For example, a creditor has no way of knowing what the profits and liquidity of a small closely held corporation are. Banks and lenders are dependent on the information that is in the financial statements and other financial documents that the company provides during a loan application.
Likewise, investors have no idea how well a company is performing since they don’t know the inner workings of the operations.
This is why financial statements are issued to external users to help them understand the company’s financial position and past performance. Investors, creditors, and other people outside the company use these reports to develop business plans as well as make business decisions about the company.
Publicly traded companies are required by the SEC to issue financial statements every quarter along with a set of other documents included management analysis and discussion as well as important notes. These reports must also be audited by a certified public accounting firm to provide investors and creditors with assurance that the financial statements are understandable and an accurate representation of the company. If the financial statements are misleading or confusing to external users, the auditors must report these findings to the public by issuing something other than an unqualified opinion.
