What is an Adverse Opinion?

Definition: An adverse opinion is a report issued by an auditor that reflects a negative judgment towards a given financial statement. In other words, it is a written comment that reflects a concern about the accuracy of the financial data presented.

What Does Adverse Opinion Mean?

Adverse opinions can be issued by auditors if, after a thorough review of an organization’s financial information, there is enough evidence to dispute the precision of such information. They are normally stated in a written report that precedes the financial statements and they constitute a sign of warning for the people in charge of reviewing the documents. From a business standpoint, an adverse opinion is an undesirable auditing outcome.

A company that gets such a report might face an in-depth investigation from its shareholders or even from tax authorities. Also, from an investor’s perspective, a company with inaccurate financial data can’t be properly analyzed; therefore a potential investment might be withheld until the issue is resolved. These reports are often drafted by Certified Public Accountants, either as self-employed professionals or as an accounting firm. The report must disclose in detail the reasons why this opinion is being given.

Example

Book Publishing Co. is a company that publishes and promotes science fiction books. Financial Analysts have been saying that this company had a great year since some of its books became U.S. top-sellers. Recently the company issued its 2016 annual report and it seems its auditors gave the company an adverse opinion. According to the auditor’s report the company has been recording purchase orders from clients as revenues, before the invoice is issued. These orders, the auditors claimed, are just business commitments that haven’t been fulfilled yet, since the company doesn’t have enough inventories to deal with all these orders right now.

This practice contradicts some important accounting principles and the auditors concluded that sales were overstated at least 30%. This report affected the company’s shares negatively in the New York Stock Exchange and the CEO is yet to pronounce about the issue.