The Audit Opinion
Choosing Our Words Carefully

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JUNE 2008 - Over the past few years, auditors have been criticized for a variety of meltdowns in the financial sector. They have been blamed for failing to detect fraud, allowing inadequate disclosure in the financial statements, and compromising their independence in dealing with management. Recently, a CPA Journal reader asked why, in the interest of full disclosure, the audit opinion doesn’t clearly state that the management of the audited company paid for the cost of the audit. One of my colleagues argued that everyone knows who pays for the audit. But do they? Certainly, all CPAs know who pays for the audit; but many users, including creditors, vendors, or others seeking to make economic decisions based on the information provided in the financial statements, may not be aware of this simple fact. Perhaps it’s time for the profession to revisit the audit opinion—not only for what it says, but also for what’s left unsaid.

Giving Assurance

The audit opinion is generally addressed to the board of directors and the shareholders, and for years the standard template has used CYA (cover your ass-ets) terminology in place of real communication. The first paragraph explains the scope of the audit and the auditor’s responsibility in the audit process; the second paragraph refers to the procedures performed “in accordance with GAAS” used to provide a “reasonable basis” for the opinion; and the final paragraph expresses the auditor’s opinion of whether the financial statements “present fairly, in all material respects” and are in conformity with GAAP.

Some might argue, “If it ain’t broke, don’t fix it.” After all, the wording used in the standard opinion has passed the test of time and has been vetted by legal gurus to make it bulletproof, right? But does it still work in today’s environment and for today’s users?

Err on the Side of Disclosure

While much has been discussed about full disclosure in the financial statements, the topic as it relates to the audit opinion has received little attention. In addition to the technical changes that reflect the ever-changing professional landscape, such as complying with PCAOB’s AS1 by reference to “the standards of the Public Company Accounting Oversight Board (United States),” the profession has been remiss in addressing two important issues.

First, we need to carefully consider the impact of the words used to describe the services the profession provides (i.e., “assurance”). Accounting standards refer to planning and performing the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. This caveat frames what can be achieved through the audit and can limit the auditor’s liability. However, when it comes to what CPA firms say in their marketing-related materials, the qualifying term “reasonable” is conspicuously omitted. The potential consequence is to (mis)lead nonaccountants to expect a greater level of confidence regarding the financial statements than is justified. Ongoing revelations of corporate scandals and restatements provide evidence that audits cannot assure the correctness of the financial statements. What a difference one little word can make in the resulting communication.

Second, we should think about the potential implications and materiality of the information that is omitted from the auditor’s report (e.g., “Company XYZ has paid us to conduct this audit and express our opinion.”). Might it make a difference to those reading the audit opinion? We can argue whether receiving payment directly from the audit client constitutes a conflict of interest—a situation in which financial or other personal considerations have the potential to compromise or bias professional judgment and objectivity. What are the odds that a source of revenue for a CPA firm could potentially influence the auditor’s professional judgment and objectivity?

The AICPA Code of Professional Conduct warns against impairment of independence in fact and appearance. If there is any doubt as to whether a source of funds or other benefits might constitute a conflict of interest—or might be perceived as such—we should err on the side of disclosure. Once they have the facts, let the public decide how much confidence they will place in the audit report.

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA, CFE




















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