What Is an Adverse Opinion?
An adverse opinion is a professional opinion made by an auditor indicating that a company's financial statements are misrepresented, misstated, and do not accurately reflect its financial performance and health. Adverse opinions are usually given after an auditor's report, which can be internal or independent of the company.
Key Takeaways
- An adverse opinion can seriously damage a company's reputation, plummet their stock price, or result in a delisting from trading exchanges.
- Accountants who deviate from GAAP, or the generally accepted accounting principles, should expect that at some point they will be looked at more closely.
- GAAP are put in place to ensure accounting compliance and transparency. Just because an accountant doesn't follow them, however, does not necessarily mean they will receive an adverse opinion.
- There are quantifiable effects of receiving an adverse opinion, but there are also effects like losing consumer confidence or business arrangements that can damage the business as well.
Understanding an Adverse Opinion
Adverse opinions are detrimental to companies because it implies wrongdoing or unreliable accounting practices. An adverse opinion is a red flag for investors and can have major negative effects on stock prices. Auditors will usually issue adverse opinions if the financial statements are constructed in a manner that materially deviates from generally accepted accounting principles (GAAP). However, they are rare, certainly among established companies that are publicly traded and abide by regular SEC filing requirements. Adverse opinions are more common among little-known firms, that is, if they are able to procure the services of a respectable auditing firm, to begin with.
An adverse opinion is one of the four main types of opinions that an auditor can issue. The other three are unqualified opinion, which means that financial statements are presented in accordance with GAAP; qualified opinion, which means that there are some material misstatements or misrepresentations but no evidence of systemic non-compliance to GAAP. There is also no disclaimer of opinion, which means that it cannot be determined whether GAAP is followed due to a lack of sufficient evidence. The unqualified opinion, obviously, is the best, while an adverse opinion is the worst.
Potential Consequences of Adverse Opinions
An adverse opinion can in some cases cause de-listing of a company's stock from an exchange. Toshiba Corp. of Japan narrowly escaped this fate when the Japanese affiliate of PriceWaterhouseCoopers gave the company a qualified opinion instead of an adverse opinion on its financial statements in 2017. However, the auditing firm issued an adverse opinion on the company's internal auditing controls, a less serious offense, but one that the company must address to earn back some trust with the investment community.
Because of the financial consequences resulting from an adverse opinion, companies are usually forced to hire a new PR agency or fire their entire accounting department altogether, attempting to regain consumer and investor trust. Unfortunately, these companies are usually too large to rebrand entirely, and a smaller company might consider remodeling their entire image, possibly even their name.
True/False
Indicate whether the statement is true or false.
Review reports issued by auditors give positive assurance as to the fair presentation of financial
statements.
Negative assurance infers that nothing has come to the reviewer's attention that requires change.
The audit report delineates the responsibility of client management and that of the audit firm.
Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The
auditor determined that the financial statements are fairly presented, except for this specifically
identifiable GAAP departure, and therefore would issue a disclaimer of opinion.
Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion.
A justified departure from GAAP will result in the issuance of an adverse opinion.
When financial statements contain generally accepted accounting principles in the current year
that are different from the generally accepted accounting principles used in the preceding year, the
auditor will typically make mention of it in the opinion.
A client that has a departure from generally accepted accounting standards that is immaterial will
receive a qualified or adverse opinion.
The failure of a client to include a statement of cash flow will result in the issuance of a disclaimer
of opinion by the auditor.
When the auditor is unable to obtain sufficient, competent evidence concerning the beginning
inventory, which is material, the report is modified by adding an explanatory paragraph prior to the
opinion paragraph and appropriate modification to the scope paragraph.
The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a
GAAP violation.
When there is an uncertainty surrounding the financial statements, the auditor may still be able to
give an unqualified opinion.
After the balance sheet date but prior to the last day of fieldwork the client decides to acquire
PaperWeight Company to obtain a significant increase in revenues. The auditor would probably
give a report that includes the statement: "except for the acquisition of PaperWeight Company...".
The client will not allow Olivia and Company, CPAs to read the minutes of the board of director's
meetings that occurred during the year under audit. Such a limitation will usually result in the
auditor issuing a disclaimer.
When the audit client has engaged other audit firms to audit remote locations around the country,
the principal auditor must mention the other auditors in his or her report.
If the auditor concludes that the financial statements taken as a whole are not fairly presented, the
auditor should issue an adverse opinion.
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