Financial Education

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.

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

The final type of auditor’s statement reflects the “going concern” clause. Accounting standards work under the assumption that the company will remain in business. If there is doubt that the company can remain in business the financial statements might not accurately reflect the company’s prospects even if they adhere to accounting standards. In this case, the auditor will append a “going concern” clause to the statement, similar to the one found in the10KSB for LABURNUM VENTURES INC:

The accompanying financial statements referred to above have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the financial statements, the company is in the pre-exploration stage, and has no established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors, along with other matters as set forth in Note 1, raise substantial doubt that the company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Needless to say, investors should be particularly cautious when evaluating a company for which the auditor has included a “going concern” clause.

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

An example of a qualified opinion is available from the auditors report for DAIMLERCHRYSLER AUTO TRUST 2005A. (Note: this is not DaimlerChrysler the company but a separate security backed by auto loans the company made to consumers.) In this report, the auditors say:

Our examination disclosed the following material noncompliance with minimum servicing standard II.1 as set forth in USAP. As explained in the Management Assertion, minimum servicing standard II.1 requires timely remittances of cash collections to the trusts. The Company’s daily remittances are to include an estimate related to interest collections, which is calculated at the beginning of each month and allocated to each remittance during the month. The calculation and allocation of estimated interest collections related to the daily remittances for January 2005 was not performed and daily interest was not remitted during the month, but was calculated and remitted in February through December.

We do not express an opinion or any other form of assurance on management’s statement referring to the accuracy of the monthly settlements or the correctness of the remittance of actual interest collections on the Distribution Date for the affected month.

In our opinion, except for the material noncompliance described in the third paragraph, DaimlerChrysler Financial Services Americas LLC has complied, in all material respects, with the aforementioned applicable minimum servicing standards for the year ended December 31, 2005.

Because of the qualifier, these statements are often called “except for” statements. Investors should make sure they understand why the auditors expressed the particular reservations before relying on the information in the report.

According to Financial Statement Analysis: A Global Perspective, the International Organization of Securities Commissions (IOSCO) states that the three principal objectives of securities regulation are:

• Protecting investors.
• Ensuring that markets are fair, efficient, and transparent (information is publicly available).
• Reducing systematic risk.

Specific requirements are left to accounting standard-setting organizations and local regulators. International Accounting Standards (IAS) and U.S. Generally Accepted Accounting Principles (GAAP) set similar guidelines, as outlined in the following table:

Although local securities regulators specify the filings securities-issuing companies in their jurisdiction must complete, international accounting standards and securities regulations are converging. Therefore, U.S. Securities and Exchange Commission (SEC) rules provide a useful benchmark. The primary financial statement filings are:

• Form 10K. Most reporting companies file this form annually with the SEC. It provides audited financial statements and a comprehensive overview of the registrant’s business. It must be filed within 90 days of the company’s fiscal year-end.
• Annual Report to Shareholders. In addition to filing a 10K with the SEC, companies issue an annual report to shareholders. This state-of-the-company report, including an opening letter from the Chief Executive Officer, in addition to the material found in the 10K.
• Proxy Solicitation Materials (Proxy Statement). State laws govern shareholder voting rights. When matters arise requiring a shareholder vote, a proxy statement must be furnished containing the information necessary to place an informed vote.
• Form 10-Q. The 10-Q is a quarterly report. It includes unaudited financial statements and provides a continuing view of the company’s financial position during the year. The 10-Q must be filed for each of the year’s first three fiscal quarters and is due within 45 days of the quarter-end.
• Form 8-K. This “current report,” is filed whenever a previously unreported material event or important corporate change affecting security holders occurs.