How Bad is a Qualified Report?

How bad is a qualified report? This question comes up almost every time a qualified report is issued to a service organization. The person(s) asking this question is usually comparing a qualified service auditor’s report (e.g., SSAE 16) to a going concern opinion on a financial statement audit. Both are bad. But how bad? A going concern opinion often means the organization is in financial peril and may meet its demise very soon. However, a qualified opinion on a service auditor’s report is more akin to a material internal control weakness disclosure for SEC registrants who have to issue such disclosures for Sarbanes-Oxley Act purposes. Signing officers for such companies are required by Section 302 of said Act Section 302 (a)(5)(A) to disclose “[a]ll significant deficiencies in the design or operation of internal controls…” and “[h]ave identified…any material weaknesses in internal controls.” It is, therefore, the opinion of this auditor that a qualified opinion in a service auditor’s report is similar to a significant deficiency or material weakness in internal control disclosure. All should be avoided by management. Though the going concern opinion is the worst of the opinions just described.

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