If your company is publicly traded, or if you’re a nonprofit, it’s mandatory for you to have an outside accounting firm audit your books every year. It’s a good idea to have one done occasionally, even if you aren’t obligated to, because your accountants are only human, and everybody makes mistakes. If the audit does find errors, discrepancies or outright fraud in your books, the auditor’s report may offer a “modified” opinion.
There Are Degrees of Opinions
Modified opinions can take a number of different forms, depending on how seriously the auditor thinks they’ll affect the accuracy of your books. This doesn’t necessarily mean that there’s been any wrongdoing. It’s just that for one reason or another, they’re likely to misrepresent your company’s financial situation.
One key factor is whether the effect is likely to be “pervasive,” which means that it broadly affects the accuracy of your financials. If it’s not pervasive, which means that the inaccuracy is limited to one part of your account keeping – the value of your inventory, for example, then the auditor’s opinion won’t be expressed as strongly. Usually, a modified opinion will be described as qualified, adverse, or given as a disclaimer of opinion.
A Qualified Opinion
A qualified opinion is a wake-up call that lets you know there’s a problem with part of your accounting or your accounting process. It’s the term your auditor will use for an error or misstatement that does have a meaningful impact on your financials, but it doesn’t indicate a widespread, pervasive problem.
It could be a problem with your inventory, resulting from a bad physical count, for instance, or with your accountants incorrectly accounting for your receivables. Your auditor will explain the basis for the qualified opinion near the end of the audit report, and then will provide the final opinion. In this case, that final opinion will explain that your books are essentially accurate, except for the specific issue that’s been identified.
An Adverse Opinion
An adverse opinion reflects a much more serious issue with your books, one that either affects your accounting process in a broad way or – despite being confined to one part of your operation – is serious enough to distort the overall “big picture” of your company’s finances. Again, the auditor’s report will include a paragraph explaining the basis for the opinion, before delivering the opinion itself.
In this case, because the errors or omissions in your accounting are more serious, the final opinion will state that your financials don’t accurately represent the company’s current condition. That’s not as serious for a private company as it would be for a public company or a nonprofit, but even if you’ve commissioned the audit for your own satisfaction, it’s a significant red flag.
A Disclaimer of Opinion
A modified opinion can also take the form of no opinion at all, which is called a disclaimer of opinion. That is what the auditor’s report will say, if there’s simply not enough information available to properly audit your financial statements. That doesn’t necessarily mean there’s anything wrong, just that the necessary information – for whatever reason – wasn’t available during the time frame of the audit.
This could happen if the audit occurred while you were having computer issues, for example, or if you’d discovered an error around the time of the audit and hadn’t yet had time to chase it down and fix it. It can also mean your bookkeeping is just not up to par, though, and that’s a real concern.
Corrective Actions Before Final Report
Usually, the auditor will identify problems before presenting the final report, and will suggest ways to correct them in your financial statements. If you’re in a position to take those corrective actions before the final report, you may be able to avoid getting a modified opinion at all. If you aren’t able to correct things before the audit, at least, you’ll have a road map for reviewing and revising your operations, so that you avoid a recurrence of the issue.
In extreme cases, if the audit uncovers evidence of fraud, embezzlement or egregious errors by your accounting firm, you may need to launch an in-depth forensic audit – one that documents how and when the behavior occurred – so you can pursue criminal or civil action against the culprit.
– Fred Decker