How to Read an Auditor's Report
11 of 11 in Series: The Essentials of Keeping Your Business Accounts
Your business's financial statement audit report can give your business a clean bill of health, or the auditor's report may state that your financial statements are misleading and should not be relied upon:
The clean (unqualified) opinion: If the auditor finds no serious problems, the CPA firm gives your business’s financial statements an unqualified or clean opinion, which it expresses in a three-paragraph report.
The qualified opinion: If the audit report is longer than three paragraphs, it’s never good news. For example, the auditor’s report may point out a flaw in the company’s financial statements but not a fatal flaw that would require an adverse opinion.
The adverse opinion: In some cases, the auditor may see unmistakable signs that a business is in deep financial waters and may not be able to convince its creditors and lenders to give it time to work itself out of its present financial difficulties. If an auditor has serious concerns about whether the business is a going concern, these doubts are spelled out in the auditor’s report.
The threat of an adverse opinion almost always motivates a business to give way to the auditor and change its accounting or disclosure in order to avoid getting the kiss of death of an adverse opinion. An adverse audit opinion says that the financial statements of the business are misleading. The Securities and Exchange Commission (SEC) does not tolerate adverse opinions by auditors of public businesses; it would suspend trading in a company's securities if the company received an adverse opinion from its CPA auditor.