Most companies listed on the Zimbabwe Stock Exchange are sweating over undesired adverse or qualified opinions issued out by auditors over the past two years owing to a departure from generally accepted accounting standards, Business Times can report.
Companies have departed from the International Accounting Standard (IAS) 29 and IAS 21.
Generally, auditors express various professional judgmental assumptions after examining a company’s financial statements to alert the public, investors, government, or other users of the financial statements, on the reliability, transparency, and accountability of companies’ financial status.
An audit opinion provides a picture of a company’s financial performance in a given fiscal year.
Investors are particularly interested in the audit opinion because it reflects the integrity of the audit report and projects an image of the company.
In the past few weeks, several listed companies published their audited full year or half year financials with the bulk of them receiving adverse or qualified audit opinions because of the issue of functional currency.
For examples, Grant Thornton Chartered Accountants, which audited ART Corporation results for the six months to March 31, 2021, said the review conclusion was adverse with respect to noncompliance with IAS21 on the effects of changes in foreign exchange rates.
“During the period, there were residual effects arising from the requirement to comply with SI 33 of 2019.
“In order to comply with SI 33 of 2019, the transactions and balances for the period October 1, 2018 to February 22, 2019 were accounted for on the basis of a rate of 1:1 between US$ and RTGS. This was not consistent with the requirement of IAS 21,” Grant Thornton said.
“The residual effects of this noncompliance have resulted in the misstatement of retained earnings in the consolidated interim financial information for the six months ended March 31, 2021.
“In addition, the foreign currency denominated transactions and balances for the months from October 2019 to March 2020 of the comparative period were translated into ZWL$ using the interbank exchange rate which did not meet IAS 21 requirements for a spot rate as the rate (s) were not available for immediate delivery.”
Another chartered accountants firm, Deloitte, also gave an adverse audit opinion for African Sun Limited’s financial results for the year to December 31, 2020.
“In our opinion, because of the significance of the matters discussed in the basis for adverse opinion section of our report, the inflation adjusted consolidated financial statements do not present fairly the financial position of the Group as at December 31, 2020, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”) and the requirements of the Companies Act and Other Business Entities Act of Zimbabwe (Chapter 24:31),” it said.
“The Group applied the requirements of IAS 29 by restating the consolidated results of the South African foreign subsidiary, to which IAS 29 does not apply in the current and comparative years.
“The financial statements of foreign subsidiaries that do not report in the currencies of hyperinflationary economies should be translated in accordance with International Accounting Standard (IAS) 21 “The Effects of Changes in Foreign Exchange Rates”, including comparatives.”
It said the group did not comply with IAS 21 in the prior financial period, as it elected to comply with Statutory Instrument 33 of 2019.
“Had the assessment required by IAS 21 occurred in the correct period from 1 October 2018, the adjustments that were recognised in the comparative 2019 period would have been materially different.
“Therefore, the departure from the requirements of IAS 21 were pervasive in the prior period,” the auditors said.
KPMG Chartered Accountants also gave an adverse opinion on ZB Financial Holdings Limited financials for the year to December 31,2021.
The Institute of Chartered Accountants of Zimbabwe CEO, Gloria Zvaravanhu, admitted that local companies were not out of the woods after adopting IAS 29.
“Over the past 2-3 years we have been battling with qualified opinions,” Zvaravanhu said, adding, “the reason for those qualified opinions is because of certain things happening in our economy that are not well aligned to the international reporting standards.”
“So, in this country in terms of standards, according to the Public Accountants and Auditors Board, we are supposed to adhere to the IFRS.
“So, when the auditors audit, they audit against that standard that was set for us. So, one of the key standards that we have not been adhering to is the one relating to foreign exchange rate. It’s IAS 21.”
“Because we have an official exchange rate and also have an alternative exchange rate and people get these monies from two different markets, it’s very difficult when reporting to be fully compliant depending on which market you are obtaining your funds from.”
This, Zvaravanhu said, has resulted in most organisations having qualified financials.
“Then we also have IAS 29, which is inflation accounting. Most companies adhered to inflation accounting.
“Only a few have had some challenges which are also linked to the IAS 21, which is foreign currency standard. So, because of the complications that arise from these two standards, a lot of organisations get qualified opinions,” Zvaravanhu said.
However, Zvaravanhu said, getting a qualified opinion does not warrant accounts to be rendered useless.
“The beauty about the qualification is that there is an opinion paragraph, where it states exactly, where you are not adhering.
“It doesn’t necessarily mean that your accounts are totally disregarded. It simply means that you did not comply with a particular aspect. So, if you go to the basis of the opinion, you will be able to see where you didn’t adhere to the standard.
“And the reader of the financial statement will be able to make their own judgment as to the basis of opinion and see whether they can rely on or not of the financial statement.
But, what is important is for as long as the financials are being checked against the international standard, they are comparable. So, someone who picks the financials from the UK or South Africa can compare because it’s the same standard that has been applied except this particular aspect that had not been adhered to. So they are not rendered useless,” Zvaravanhu said.
Four audit opinions, however, stand out.
Apart from qualified and adverse opinions, auditors also issue out unqualified and disclaimer opinions.
On the one hand, when there are matters that concern the auditors, including gross mistakes, misappropriations and misstatements, the auditors issue out qualified and adverse opinions, depending on the level of materiality. These, experts said, should be avoided at all costs.
A qualified opinion is issued when the auditor is not satisfied with some processes and transactions.
This is a negative opinion about a company’s financial status.
Auditors also issue an adverse opinion when they are not satisfied with the financial statements or discover a high level of material misstatements or irregularities.
In many cases, investors, the government, and other users of the financial statements will not trust the company’s financial report, which received an adverse audit report.
Usually, the adverse opinion indicates that financial reports contain gross misstatements.
Such reports send out a high alert that the company’s financial records have not been prepared according to the Generally Accepted Accounting Principles (GAAP).
Financial institutions and investors take this opinion seriously.
On the other hand, a disclaimer opinion means an auditor was unable to complete a successful and accurate audit due to some reasons.
An unqualified opinion is a clean audit report, which is the best a company can get.
It means the books of accounts are free from errors and are in accordance with GAAP.
The unqualified opinion means the auditors are satisfied with the company’s financial reporting.
It indicates that auditors believe that the company’s operations are in good compliance with governance principles and applicable laws.
The auditors, the investors and the public perceive such a report to be free from material misstatements.