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.
- 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.