For business owners who have hired a CPA or Audit Firm to conduct an independent audit of your financial statements for the first time, the results can be deceiving. Whether your organization is required to perform an annual audit, seeking a merger or acquisition, approaching an IPO, or seeking a business loan, navigating an independent auditor’s report can be slightly confusing. An unqualified opinion, which seems like it would be a bad thing, is actually the best result that you can get, stating that your company has followed all GAAP guidelines and your financial statements are free of any material misstatements. On the other hand, a qualified opinion states the opposite: either the financial statements of your organization contain misstatements, or the auditor is unable to obtain evidence regarding a certain account balance. It’s important to note that the misstatements shouldn’t have a pervasive effect on your financial statement.  The primary question we want to answer today, however, is what to do after receiving a qualified opinion.

Details of a Qualified Opinion

When you receive a qualified opinion from your accountant or auditing firm, it’s because your financial statements don’t conform with GAAP or the auditor couldn’t find enough information to verify a certain part of your financial statements. With a qualified opinion there are mistakes, but they don’t affect the accuracy of the statements. The report that is issued by the auditor will include an explanation which essentially says, “everything looks good except for…”.

Effects of a Qualified Opinion

While a private merger may not be affected by a qualified opinion if all parties are clear on the issue, a qualified opinion can adversely affect your company’s ability to get an IPO or receive lending. As a publicly held company, a qualified opinion can threaten your organization with a devaluation.

Fixing Modified Opinions

While receiving a qualified opinion on your financial audit may be a nerve-racking experience, it happens to even the best companies from time to time and should be seen as an opportunity to identify mistakes or weakness in your company’s financial reporting and compliance.  It’s highly likely that your auditor will identify the issues with your accounting that fall short before they make the final report. In the majority of cases, this will give you the opportunity to correct the issue before it makes Its way to your report as a modified opinion.

Alternatively, if you do receive a final report with a qualified opinion, you can use this report red flag to avoid similar issues in the future. A qualified opinion will typically not include fraudulent activity (this would most likely be an adverse opinion), so normally a qualified opinion won’t end with your company having to do a forensic audit. Now that you have identified problem areas with your accounting you can take steps to correct them in future audits.

Keep in mind, a qualified opinion is, after all, an opinion. Your firm has the option to seek out a different auditing firm to have a second audit done. If the second auditing firm comes up with a different interpretation, you can use this to mitigate the first audit. However, this is highly unlikely as the treatment of financial statements is typically black and white.

Conclusion

Having an audit conducted is an annual requirement for publicly held companies and nonprofits alike; however, even if you aren’t obligated to have an audit conducted, it is a good idea. No one is perfect and even accountants sometimes make mistakes. The Baird Audit Group specializes in audit and financial reporting services, so contact us today, online or call at 706-855-9500, with questions about a previous audit or to schedule a new one.