What is an Adverse Opinion?
Definition: An adverse opinion is a report issued by an auditor that reflects a negative judgment towards a given financial statement. In other words, it is a written comment that reflects a concern about the accuracy of the financial data presented.
An adverse opinion is independent auditor’s written view (with supporting reasons) that the financial statements of an organization
- do not fairly present its actual financial position,
- are not in conformity with the provisions GAAP and/or,
- the required information was either not disclosed, or (if disclosed) was inadequately disclosed or was inaccurate.
Also called auditor’s adverse opinion.
An adverse opinion is a statement made by an entity’s outside auditor, that the entity’s financial statements do not fairly represent its results, financial position, and cash flows. The opinion may also be issued if certain required disclosures do not accompany the financial statements, or if the entity has not prepared its financial statements in conformity with the provisions of the applicable accounting framework. The auditor states the reason for this type of opinion within the report. This is an unusual outcome, since the auditor is normally able to convince the client to alter its financial statements to achieve a higher degree of reporting fairness. When an adverse opinion is rendered, the client is typically unable to issue the financial statements to outsiders, such as creditors, lenders, and investors.
What Does Adverse Opinion Mean?
Adverse opinions can be issued by auditors if, after a thorough review of an organization’s financial information, there is enough evidence to dispute the precision of such information. They are normally stated in a written report that precedes the financial statements and they constitute a sign of warning for the people in charge of reviewing the documents. From a business standpoint, an adverse opinion is an undesirable auditing outcome.
A company that gets such a report might face an in-depth investigation from its shareholders or even from tax authorities. Also, from an investor’s perspective, a company with inaccurate financial data can’t be properly analyzed; therefore a potential investment might be withheld until the issue is resolved. These reports are often drafted by Certified Public Accountants, either as self-employed professionals or as an accounting firm. The report must disclose in detail the reasons why this opinion is being given.
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.
Example
Book Publishing Co. is a company that publishes and promotes science fiction books. Financial Analysts have been saying that this company had a great year since some of its books became U.S. top-sellers. Recently the company issued its 2016 annual report and it seems its auditors gave the company an adverse opinion. According to the auditor’s report the company has been recording purchase orders from clients as revenues, before the invoice is issued. These orders, the auditors claimed, are just business commitments that haven’t been fulfilled yet, since the company doesn’t have enough inventories to deal with all these orders right now.
This practice contradicts some important accounting principles and the auditors concluded that sales were overstated at least 30%. This report affected the company’s shares negatively in the New York Stock Exchange and the CEO is yet to pronounce about the issue.
Why Does Adverse Opinion Matter?
This kind of opinion is the signal for shareholders and investors to noted that the financial statements of the entity are not reliable and they should not use or rely on the financial information to make a decision.
This also an alert to the shareholders that the executive’s people who run entity have some kind of problem-related to integrity.
Therefore, attention should be paid not only on the financial information but also on other reports that prepared by or report by executives.
From an auditor’s point of view, this opinion will adversely affect the client, and normally there will be serious react from the client’s management team.
So auditors should ensure that they have clearly understood the problems found and always following the audit guideline to make sure that auditors themselves are the ones who not misunderstood.
All relevant accounting standards are confirmed and checked against the mater points.
Auditors should also obtain the professional legal advice on the issued raise so that both perspectives: Accounting and Laws are come up with the same conclusion.
Types of Opinions
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; and disclaimer of opinion, which means that it cannot be determined whether GAAP is followed due to lack of sufficient evidence. The unqualified opinion, obviously, is the best, while an adverse opinion is the worst.