Imagine The Voice or American Idol, except where the judges are all accountants.
Once auditors have completed an evaluation of a company's financial statements, they issue a document called (without much creativity) the "auditor's opinion." There are three basic types of opinions (the financial equivalent of "marry, date, kill"): an unqualified opinion, a qualified opinion and adverse opinion.
An unqualified opinion might sound like when that pretentious guy at dinner starts spouting off about wine. But in fact, the "unqualified" version is the most common result and by far the most positive. It basically says the auditor approves the results without qualification (thus the name "unqualified"), agreeing that the numbers accurately reflect the company's financial situation.
The qualified opinion is like when you talk about a movie after only seeing the trailer. It outlines ways in which the audit may have been limited...basically saying "everything looked okay that we could see, but we didn't get to look at everything."
Then there's the real bummer. An adverse opinion suggests that the financial statements have serious issues and the auditor is not willing to stand behind them as an accurate portrayal of the company's finances. This option is rarely used. If the auditor has issues with the financial statements, they will often opt for a fourth possibility, known as a disclaimer. This option represents the auditing equivalent of saying "pass"...the auditor issues no opinion and then describes why they couldn't come to an adequate conclusion.
Related or Semi-related Video
Finance: What is Adverse Audit Opinion?27 Views
Finance a la shmoop. What is an adverse audit opinion and you know deficiency
letter. Okay people this is not good you thought you had good grades but when [Report card is thrown onto the desk]
you got your report card your teachers had opinions adverse to yours... [Report card has bad grades in it]
They sent your parents a deficiency letter you know the one with all those [Mom looks shocked]
D's on it well when it's a company's audit that has similarly gone awry it's [Boss looks angry and employee looks shocked]
the nice way to say it well then it means they didn't count the beans
properly when they gave their financial reports to their investors or whoever
the auditors were serving usually this implies that companies overstated how [Employee counting coffee beans]
profitable they really were or how well they were really doing so tens of
thousands of investors if you know the company was public when this all [Big line of people waiting to invest]
happened paid twenty seven dollars and 32 cents a share when with the real
numbers the stock probably should have been trading more at like you know
fourteen dollars and 27 cents a share big difference well basically an auditor
is saying that yours are not bread-and-butter misstatements no oops [Bean report with the numbers crossed out]
it's more of a dude there were material ie important
mistakes and they were pervasive like everywhere math, science, english, history
your failure it's no mystery that's how auditors talk really
all right well then there are massive losses to massive numbers of people who hire [Protesters on a street]
massive numbers of lawyers who sue you.. massively.. in the world of finance an
adverse audit opinion is a bit like running over everyone's favorite dog [Car goes over a bump]
several times only you're the one who is likely dead meat [Guy reverses and runs the dog over again and the owner comes to fight]
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