Qualified Opinion - what now?
Anonymous (CFO)
| Dec 19, 2011We may be issued a qualified opinion on our audited financials this year. We are opting to do this as we do not agree with the treatement of a specific item. We don't have much heartburn about this now and are very comfortable defending our position as to why we do not agree with the auditors. What about the future. What if I want to do a deal - M & A or an IPO. Will this stand in the way? What are my options? I am considering leaving the firm we use for another as well.
Answers
Company: TTX
A qualification for non-conformance with GAAP risks major issues for both lenders - many covernants require GAAP conformance - and IPOs, as tne SEC will not likely accept such a qualification in an initial filing and selling the IPO will be much more difficult. A "private" merger deal may not be affected, but one with a public entity may be more difficult.
Company: Consultant
NOTE: The following is only my general opinion. However, I will need to know more specifics of your situation before I can provide more specific comments that will be more suited to your situation for which you can send me a message at "Sunil.CPA.CFA @ gmail.com".
In my business experience I have had many disagreements with the auditors, but in the end have never encountered a situation that we landed up with a qualified opinion for the issued financials. Application of U.S. GAAP to complex situations is not entirely black and white....there are many shades of grey that might be subject to interpretation. I do agree with you that you certainly will be able to defend your position, but you need to access what is the real cost for the qualified opinion to your business?
If you are issued a qualified opinion, you are just bringing more scrutiny to your financial statements for no reason at all, that might result in increased risk and potential lower valuation for your company. Hence, sometimes you might need to swallow this with a pinch of salt as the optics of having a qualified opinion do not look good. In addition, the optics of changing the auditors after obtaining a qualified opinion - also do not look good.
On the other hand if you are so certain that your auditors are not interpreting GAAP properly, suggest obtaining opinion of another external consultant and provide a white paper to your auditors. In some cases that might help in changing the mind of the auditors.
In a M&A deal, valuation of the business is independent of U.S. GAAP numbers. So you can get the valuation adjusted based on your interpretation.