An adverse opinion
indicates that the agency's financial records do not conform to generally accepted accounting principles (GAAP).
We extend this line of research by focusing on a sample of firms that received an adverse opinion
on internal controls, and examine the specific factors that affect auditor turnover, including the severity and nature of the internal control deficiencies, the amount of auditor-related fees, the length of the auditor-client relationship, and the type of audit firm that expressed the negative opinion.
Since there are only 23 disclaimers or adverse opinions
, we merge them into qualified opinions to increase the power of statistical tests.
are in fact a negative statement, clearly advocating that the financial results do not represent a fair presentation.
Approximately 11% of companies received adverse opinions
on internal control in 2006, down from 16% in 2005.
However, while some people may expect a certain level of adverse opinions
to be issued by companies, others may overreact if they are surprised by such opinions.
In both the qualified and adverse opinions
, the auditor will include in the opinion the departure from GAAP and will quantify the amounts involved, if determinable.
Regarding whether we contemplate a "flurry of disclaimers" where auditors are unable to "successfully complete an audit," yes, we do; in fact, we expect adverse opinions
to become more common.