Review Notes – Volume 3

With filing season in full swing, we thought that it would be a nice change of pace to reveal another volume of Review Notes. In this edition we will be focusing on audit opinions that you would mostly read about in accounting books, but rarely see in real life.

Disclaimer of an opinion

How often do you see a disclaimer of an opinion (a report lacking conclusion about lack of material misstatements due to a lack of evidence and/or limited scope)? We’ve seen (and blogged about) such an opinion at the end of 2016 we. Interestingly, ICFR conclusion might be subject to similar scope limitations. Look at the opinion below that was published on October 24, 2016:

“Since the management of the Company was not able to provide a complete set of documentation of the company’s internal control policies and procedures designed for implementation and we were unable to apply other procedures to obtain sufficient evidence about the effectiveness of the company’s internal control over financial reporting, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on [The Company] internal control over financial reporting.”

In this instance the firm cited a lack of proper documentation of internal control policies and an insufficient scope of work as the reason for their disclaimer audit opinion.  Normally, lack of proper documentation would justify ineffective ICFR.

Incomplete or missing audit reports

Sometimes, issuers file financial statements before their auditor completes all of the audit procedures needed to provide an opinion. Here is an example (worth noting that the audit opinion was subsequently filed in an amended filing):

“The annual audit of the Company’s financial statements is in process, but has not been completed as of the date of filing this Form 10K for the year ended September 30, 2016.

The Company understands that the staff of the Securities and Exchange Commission (the “staff”) has taken the position that this report is deficient because the annual financial statements contained in this report for the year ended September 30, 2016 have not yet been audited by an independent registered public accountant as required by Rule 10-01(d) of Regulation S-X.

The Company understands that completion of the audit of its annual financial statements and the filing of an amendment will make this report current, although it will not be deemed timely for purposes of the rules governing eligibility to use registration statements on Forms S-2 and S-3. When the audit is complete, the Company will file an amendment to this report which will include the independent auditors’ report and the required certifications of the Company’s Principal Executive Officer and Principal Financial and Accounting Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act.”

This filing has since been amended.

Incomplete audit opinions

We have seen at least one case where an audit opinion was lacking auditor name, signature date, auditor consent or any other information that would identify the auditor. We understand that sometimes preliminary registration filings may include opinions that are contingent on future events, but with even basic information missing, should we consider this an opinion?

As we make our way through the remainder of busy season, we expect to see mostly boilerplate reports. However, as oddities like these appear, we will continue to keep you updated.