Why Shares of AmTrust Financial Services Inc. Are Plunging Today

By Jordan Wathen Markets Fool.com

What happened

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Shares of AmTrust Financial Services (NASDAQ: AFSI) are trading down about 15% as of 11:15 a.m. EST after the company said it would need more time to file its annual report with the Securities and Exchange Commission due to inaccuracies and weaknesses in its internal controls.

So what

AmTrust specifically noted that it needs more time to complete its consolidated financial statements and assessments of internal controls over financial reporting for its 2016 fiscal year. Due to the delay, KPMG, which was appointed as its new auditor on April 1, 2016, will also need more time to complete its audit of its financial statements.

The company noted that it would also be making "immaterial corrections to errors in its financial statements" for fiscal 2014 and 2015 and certain financial information for its 2013 and 2012 fiscal years. AmTrust also said that it expects to disclose material weaknesses in its 10-K filing.

Image source: Getty Images.

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Now what

Wall Street typically takes the view that while the actual accounting errors may be immaterial, the existence of accounting errors is very material. More so than in perhaps any other industry, financial companies' earnings are based on significant estimates by management. That a company's financials may be untrustworthy is reason for many to sell, particularly when the news comes only after the appointment of a new auditor.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of AmTrust Financial Services. The Motley Fool has a disclosure policy.