Analyzing the Auditor’s Statement: Disclaimer of Opinion
Securities regulations require the company’s auditors to provide a report stating whether investors can rely on the information presented. Such reports can take several forms:
- Unqualified opinion
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
- Going concern clause
An example of a disclaimed auditor opinion for a large public company is available in the 10-K for FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE):
Due to the nature of these weaknesses: the consolidated financial statements for the years ended December 31, 2003 and 2002 were restated to correct numerous significant misstatements related to debt and derivatives, commitments, investments in securities, trust consolidation and sale accounting, financial guaranties and master servicing, amortization of cost basis adjustments, and other items; the consolidated financial statements for the year ended December 31, 2004 and the quarter ended September 30, 2004 were not filed timely; and, there is more than a remote likelihood that a material misstatement to the Company’s financial statements might not be detected and prevented by the Company’s internal controls over financial reporting. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2004, of the Company and this report does not affect our report on such consolidated financial statements.
Because of the limitation on the scope of our audit described in the second paragraph of this report, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on management’s assessment referred to above. In our opinion, because of the effect of the material weaknesses, summarized above and described in Management’s Report on Internal Control over Financial Reporting, on the achievement of the objectives of the control criteria and the effects of any other material weaknesses, if any, that we might have identified if we had been able to perform sufficient auditing procedures necessary to form an opinion on management’s assessment, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Given that even the auditors are not willing to express an opinion on the validity of the included financial statements, investors should think hard before investing in companies that have been given a disclaimer of opinion.
For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis, Securities Regulation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
