Adverse OpinionExplained & Defined
What is an Adverse Opinion?
When a professional audit is performed by a statutory auditor on the financial statements prepared for a company at the close of its fiscal year, the auditor will provide an opinion on the accuracy and fairness of their contents.
An adverse opinion indicates that in the auditor’s view, the financial statements are misrepresented or misstated and fail to provide a true and fair view of the company’s health and financial performance.
This is a negative opinion that can result in severe damage to the reputation of a company.
What Does an Adverse Opinion Mean?
After an audit is completed, the auditor will provide one of four different opinions.
- Unqualified opinion which indicates that the auditor found no material misstatements
- Qualified opinion which indicates some specific concerns are listed in the audit report concerning the financial statements
- Disclaimer of opinion which indicates the auditor felt they were unable to issue an opinion at all
- Adverse opinion which indicates significant misstatement or misrepresentation.
In most cases, companies will receive an unqualified opinion which indicates that the auditor believes the company’s financial statements are an accurate and truthful representation of its current financial standing.
Adverse opinions can cause significant harm to companies as they imply either corrupt or poor accounting practices.
These opinions are issued after an auditor has thoroughly reviewed a company’s financial information and supporting evidence.
When an adverse opinion is issued, it will generally be provided in a report preceding the statements to which they apply.
This can serve as a major warning for investors who may conclude that the statements cannot be trusted.
This can, in turn, lead to a drop in stock prices and potential investigations from government authorities if it implicates fraud or any issues that could affect a company’s tax burden.
An adverse opinion is rarely issued, particularly for larger companies, but if it is, the consequences can be severe.
In some cases, a company may even be delisted as a result of an adverse opinion.
It can be particularly difficult for a company to recover the faith of investors, financial institutions, and business partners after receiving an adverse opinion.
In many cases, a company may respond by laying off its existing accounting departments and performing significant public relations work to try and regain the public’s trust.
However, this can be difficult and take considerable work to accomplish.
As a result, companies take the risk of this very seriously and will work hard to avoid ever receiving an adverse opinion.
The Difference Between an Adverse Opinion and a Disclaimer of Opinion
Though both will often be considered an adverse result to an audit by the company on which it is being performed, an adverse opinion and a disclaimer of opinion are two very different results.
An adverse opinion indicates that the auditor has received the financial information and evidence they need to form an opinion as to the accuracy of the documents.
Based on this information, when the auditor issues an adverse opinion, they have concluded that the financial statements do not represent an accurate and fair picture of the company’s performance and health due to misstatement or fraud.
This will be issued when the auditor has the knowledge necessary to judge that the financial statements are inaccurate.
In contrast, a disclaimer of opinion indicates that the auditor is unable to form an opinion as to the accuracy of the financial statements.
The auditor might issue a disclaimer of opinion if they have not received suitable information from a company’s management or have been restricted from receiving suitable evidence from the company or third parties.
Though a disclaimer does not mean that the financial statements are necessarily inaccurate, it means that the auditor cannot confirm that they are accurate, and many investors and institutions will likely not trust them as a result.
Key Takeaways
- If an auditor issues an adverse opinion, it indicates that in the auditor’s view, the company’s financial statements are not an accurate and fair picture of the company’s health and financial performance.
- If a company’s financial statements receive an adverse opinion, it may result in severe harm to the company’s reputation and potentially result in a delisting from stock exchanges.
- Though a violation of GAAP principles may lead to increased scrutiny in itself, this will not necessarily result in an adverse opinion.