Governance Explainer Qualified audit opinion

However, some eagle-eyed investors noticed that Victoria had not actually received a completely clean bill of health from its auditor. The firm’s delayed annual report showed that Grant Thornton, its external auditor, had delivered a ‘qualified audit opinion’ for the year to April 1.

The auditor’s concerns centred on a subsidiary company called Hanover Flooring. Grant Thornton said it had identified “risk factors of fraud”, potential irregularities relating to some transactions within Hanover, and possible cases of non-compliance with Money Laundering, Terrorist Financing and Transfer of Funds regulations.

Shares in Victoria plummeted as much as 24.6%.

Grant Thornton said in its report that it had raised its concerns with Victoria’s management and sought to obtain further evidence, “but were unable to do so because management imposed a limitation of our scope”.

Victoria said: “There is no wrong doing at Hanover and nor are the auditors alleging this. Hanover’s issue was predominantly one of having heightened financial risk due to inadequate accounting records, a situation that is regularly found when smaller businesses are acquired, as their standards of financial controls and record keeping often don’t match the high levels we have across the rest of the group.”

The debacle highlights the potential damage that a qualified opinion from the auditor can do and how important it is for companies to receive a ‘clean opinion’.

Unmodified v Modified Opinion

Auditors are required to give either an unmodified opinion (commonly referred to in business as a ‘clean’ opinion), or a modified opinion.

An unmodified opinion is provided where the auditor considers that the financial statements give a true and fair view of the company affairs at the balance sheet date and of its profit or loss for the accounting period.

A modified audit opinion can arise where there is an error, a disagreement over a particular matter or a lack of sufficient audit evidence in a particular area of the financial statements, including disclosures – which often leads to a ‘qualified opinion’.

The qualified opinion leads to the auditor stating that the financial statements of a client are fairly presented, except for a specified issue. As with Victoria, the issue typically relates to a limitation on the scope of the audit, so that the auditor was unable to obtain sufficient evidence to verify various aspects of the transactions and reports being audited.

Qualified opinions may also be issued if there is a lack of conformity with GAAP (Generally Accepted Accounting Principles), inadequate disclosure, uncertainties in estimates, or the statement of cash flows has been omitted.

An organisation that is being audited tries to avoid a qualified opinion, as it casts doubt on the financial statements of the business.

Going Concern

Most of the time a qualified opinion is explainable and relates to fairly benign issues. But, in some cases, it may alert investors to potentially larger problems that could threaten the long-term viability of a business.

A company is a going concern if it is able to remain in business for the foreseeable future. Auditors will evaluate management’s going concern assumptions for a minimum period of one year from the date of the audit report and will consider whether any material uncertainties exist that may cast significant doubt on the company’s ability to continue as a going concern.

In some cases, the auditor may issue a ‘material uncertainty relating to going concern’ paragraph in the audit report. This can often be due to external factors, such as uncertain or unstable economic conditions.

It means that the directors have concluded that there is a material uncertainty about the company’s future operations, and that the auditors agree with that judgement. Crucially, it also means the directors have made clear, transparent disclosures in the financial statements regarding the nature and implications of the material uncertainty.