What Is a Piecemeal Opinion?
Auditors provide a piecemeal opinion in a situation where complete information is not available. Accounting standards such as generally accepted accounting principles (GAAP) generally no longer permit the use of these statements as they often can contradict the effect of the overall opinion presented.
- A piecemeal opinion is a report issued by an outside auditor expressing a view limited to only specific line items within a company's financial statements.
- Auditors provide a piecemeal opinion in a situation where complete information is not available.
- There are four types of opinions that an auditor can provide on financial statements: unqualified, qualified, adverse, and a disclaimer.
- Piecemeal opinions would typically accompany adverse opinions to offset them.
- Accounting standards no longer allow auditors to provide piecemeal opinions because they tend to contradict the effect of the overall opinion.
Understanding a Piecemeal Opinion
The Securities and Exchange Commission (SEC) requires all public companies to open up their books to external auditors. These independent contractors are then tasked with reviewing the contents and expressing an opinion on whether the information contained within financial reports circulated to investors is fair, free of error and fraud, and accurately reflects the company's financial situation.
In general, there are four different opinions that auditors can log. They are:
- Unqualified opinion: The financial statement is judged to be fairly and appropriately presented.
- Qualified opinion: A company's financial records have not entirely been presented in accordance with GAAP, although no misrepresentation has been identified and the company is deemed to have done nothing wrong.
- Adverse opinion: Financial records violate many or key GAAP rules and contain material misstatements that must be corrected.
- Disclaimer of Opinion: Filed in the rare event that the auditor is unable to complete their report due to the absence of financial records or insufficient cooperation from management.
When relevant, a piecemeal opinion would occasionally accompany an adverse opinion or a disclaimer of opinion. The point was to offset the adverse opinion to show that certain parts of the financial statement were compliant.
Then, after much controversy, queries, and several complaints, it was later determined that piecemeal opinions could no longer work in harmony with these forms of statements, basically rendering them useless. The reason was that all parts of financial statements are interconnected, so it would be difficult to ascertain which parts are compliant with accounting standards and which parts are not.
Regulators came to the conclusion that piecemeal opinions effectively contradicted and overshadowed more comprehensive opinions that are based on the financial picture as a whole and responded by banishing them.
Practicality of a Piecemeal Opinion
When they were allowed, piecemeal opinions had to be extremely specific in order to be credible since many components of a company's financial statements are interrelated.
According to former SEC Chief Accountant Carman G. Blough, it might be possible to express a piecemeal opinion on the accuracy of certain items listed on a company's balance sheet, but it would not be possible to express a piecemeal opinion on the balance sheet as a whole because of the balance sheet's relationship with other financial statements, such as the income statement.
This in turn made piecemeal opinions confusing and for the most part worthless, as they could not give an accurate depiction of a company's financial statements as a whole, particularly in relation to other parts of the statements. It left little benefit to an individual that was analyzing the financial statements.
Piecemeal Opinion for Investors and Analysts
Because investors and analysts use financial statements to determine the value of a company, its prospects as an investment, and its future profitability, it is determined that the best course of approach is to look at them wholly with the big picture in mind.
This is particularly true when trying to calculate financial ratios. For example, if an investor was looking to calculate the debt-to-equity ratio of a firm and the piecemeal opinion states that the shareholders' equity component of the ratio could be confirmed as accurate but the liabilities component could not, this makes the calculation of the ratio a futile endeavor that brings no clarity to the person analyzing it.