‘Why adverse audit opinions are the worst type of financial reports’

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PHILLIMON MHLANGA

Nearly all Zimbabwean companies’ financial reports are not complying with the requirements of global accounting standards meaning they are grossly misstated.

The standards include the Generally Accepted Accounting Practice (GAAP), International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

Several financial experts who spoke to this newspaper this week said the adverse audit opinions that almost all companies that recently published their results received means the statements do not present fairly the financial position or balance sheet, performance and
cash-flows of the companies.

The adverse opinions, they said, have severe consequences for the reporting firms as at a minimum it ensures that investors, regulators, lenders and governments will reject the reports. Also in other countries, if the audit reveals illegalities, corporate officers may
be held accountable personally. But, it rarely happens in Zimbabwe.

They also said when such type of a report (adverse) is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept the report. In fact, it is the most unfavourable a business may receive as it indicates that financial records do not comply with GAAP, meaning they are not reflecting true standing state of a position.

Generally, investors, lenders and other financial institutions do not typically accept financial statements with adverse opinions.

This comes at a time when Zimbabwe is in a desperate bid to deal with currency headache and limited foreign currency.

President Emmerson Mnangagwa this week said Zimbabwe, which ditched its defenseless currency in 2009 due to hyperinflationary pressures, will have its Zimbabwe dollar again before the end of the year.

Of all the Zimbabwe Stock Exchange listed companies and other financial institutions which recently published financial results for the year to December 2018 and March 2019, almost all firms received adverse audit opinions, which is the worst type of a financial report
that can be issued to a business.

Only, OK Zimbabwe, which published its financial results last week received an unqualified audit opinion. Unqualified audit opinion is the best possible audit outcome. The rest received adverse audit opinions, raising a serious concern to potential investors.

Audit opinions, which also include qualified opinion where auditors are not entirely confident that the financials of an entity comply with GAAP, addresses two questions that is do the financial statements confirm to GAAP and that do they fairly represents the entity’s
financial accounts.

The development comes at a time when the country is courting potential suitors to inject fresh capital into the country’s ailing companies, which are in need of the much required offshore capital to tool their operations. But, their financials are in shambles and mislead
potential investors.

In its audit opinion on Masimba Holdings, Grant Thornton Chartered Accountants said: “In our opinion, because of the significance of the matter discussed in the basis for adverse opinion section of our report, the accompanying consolidated financial statements do not
present fairly the consolidated financial position of Masimba Holdings as at December 31, 2018 and its consolidated financial performance and its consolidated cash flows for the year ended in accordance with International Financial Reporting Standards and International
Accounting Standards (IAS) 21.”

In its report on Rainbow Tourism Group, Grant Thorton Chartered Accountants said the “audit opinion on the company’s financial statement is an adverse opinion because of non-compliance with IAS 21”.

EY which audited CBZ Holdings Financials said: “An adverse opinion was issued thereon because of non- compliance with International Accounting Standard (IAS) 21 (Effects, of changes in foreign exchange rates).”

Part of an independent audit report for properties investment, development and management firm, First Mutual Properties reads: “An adverse opinion was issued in respect of functional currency as requirements of IAS 21 Effects of foreign exchange rates were not met. The auditor’s report includes a section on key audit matters as defined by ISAF 701 Communicating key audit matters in the independent auditor’s report.”

On ZB Financial Holdings financial statement, Deloitte & Touche said the “condensed financial results should be read in conjunction with the complete set of financial statements of ZB Financial Holdings Limited for the financial year ended December 31, 2018 and an adverse opinion issued thereon”.

“The basis for the adverse opinion pertains to non- compliance with IAS 21″Effects of changes in foreign Exchange Rates”. In addition, the auditor’s report carries key audit matters outlining areas of the audit process that requires significant attention of the author,” the auditors said.