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Explanatory Language May be Added
to the Auditor's Unqualified Opinion
By Michael C. Dennis, MBA, CBF
Certain accounting situations require auditors to add explanatory
language to the standard report. Adding the additional language is
not regarded as a qualification because it does not lessen the auditors'
reporting responsibility. Auditors add explanatory language to an unqualified
opinion on matters such as these:
- To indicate an inconsistency in the application of accounting principles;
- To emphasize a matter of particular importance;
- To refer to an uncertainty that could have a material impact on
the company's financial statements.
A special type of significant uncertainty that is important to the
credit professional concerns the ability of a company to continue as
a going concern. Under generally accepted accounting principles, both
assets and liabilities are recorded and classified on the assumption
that the company will continue to operate. Assets, for example, may
be presented at amounts that are significantly greater than their liquidation values.
Conditions that may cause the auditors to question the going-concern
assumption include a bankruptcy filing, defaults on loan agreements,
work stoppages, and legal proceedings. If a substantial doubt exists
about the company's ability to continue as a going concern for a period
of one year from the balance sheet date, the auditors modify their
report by adding a final paragraph such as the one listed below relating
to a bankruptcy filing:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of ABC Corporation
"In our opinion, the consolidated financial statements listed
in the accompanying index present fairly, in all material respects,
the financial position of ABC Corporation and its subsidiaries at
April 30, 2002 and April 30, 2001, and the results of their operations
and their cash flows for each of the three years in the period ended
April 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule
are the responsibility of ABC's management; our responsibility is
to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming that ABC Corporation will continue as a going concern, which
contemplates continuity of ABC's operations and realization of its
assets and payments of its liabilities in the ordinary course of
business. As more fully described in the notes to the consolidated
financial statements, on March 15, 2002, ABC Corporation filed a
voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code. The uncertainties inherent in the bankruptcy
process and ABC's recurring losses from operations raise substantial
doubt about ABC Corporation's ability to continue as a going concern.
ABC Corporation is currently operating its business as a Debtor-in-Possession
under the jurisdiction of the Bankruptcy Court, and continuation
of ABC as a going concern is contingent upon, among other things,
the confirmation of a Plan of Reorganization, ABC's ability to comply
with all debt covenants under the existing debtor-in-possession financing
agreement, and ABC Corporation's ability to generate sufficient cash
from operations and obtain financing sources to meet its future obligations.
If no reorganization plan is approved, it is possible that ABC's
assets may be liquidated. The consolidated financial statements do
not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome
of these uncertainties."
Note that a "going concern" paragraph lists a number of
potential problems that could result in the company's failure. For
this reason, an experienced credit manager will always take the time
to read the Auditor's Opinion Letter carefully. |
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