In Finance, what is a Qualified Opinion?

In finance, qualified opinion is a written opinion issued by an accountant or auditor that points out reservations of the auditor regarding the accuracy of the financial records examined. Situations prompting qualified opinions involve a limited scope of the audit, or missing or misstated information. An auditor might also write a qualified opinion if he discovers an unusual accounting practice that does not comply with generally accepted accounting principles (GAAP).

Auditors issue three types of opinions after reviewing financial records. An unqualified opinion states that the financial statements provide an accurate representation of the company. A qualified opinion contains some exceptions. An adverse opinion contains substantial exceptions or warnings.

GAAP consists of a common set of accounting standards and procedures followed to establish consistency in the financial statements. If an auditor is unable to substantiate the inventory due to a remote location, he might write a qualified opinion. Other examples of reasons for a qualified opinion include the uncertainty of the outcome of an upcoming lawsuit or uncertain tax liability of an unorthodox business transaction.

The auditor's report typically contains three paragraphs. Initially, the auditor states the obligations of the auditor and directors. Next, he discusses the extent of the audit and states that the company used GAAP. Finally, he gives the auditor’s opinion in the third paragraph, in which he notes the qualified opinion if appropriate.

The auditor’s report is a standard component of a company annual report. Along with the auditor's statement, an annual report will include financial highlights, corporate information, and financial statements. Companies also typically include a letter to the shareholders and discussion and analysis of management.

An audit is unqualified if the auditor's opinion states that the financial statements provide "a true and fair view” of the company. The financial reports of listed companies are routinely given an unqualified opinion on the audit report. Most companies will recognize and manage any possible problems before the delivery of the annual reports. Even an unqualified opinion is only an opinion, not a warranty. Auditors can be deceived by pervasive falsification of the accounts, especially if the management methodically prepares the fraudulent accounting.

A qualified opinion may be the result of the Andersen effect, a condition in which auditors perform intensely thorough investigations when auditing companies in order to avoid accounting errors. This enhanced degree of scrutiny often results in companies restating earnings reports even when there has been no intentional misrepresentation of pertinent accounting information. Companies conduct audits to instill confidence in investors that the company financial statements are accurate. To protect against potential litigation arising from overlooked financial improprieties, such as material misstatements, auditors carry malpractice insurance.