Do audit opinions even matter anymore?

Do audit opinions matter?

The Second U.S. Circuit Court of Appeals says “no” — at least regarding the botched audit of AmTrust Financial Services.

Between 2014 and 2017, BDO USA auditors signed off on financial statements containing improper accounting adjustments exceeding $300 million. That’s according to a lawsuit filed by the SEC. The case was settled in 2020; AmTrust agreed to pay civil penalties of $10.3 million without admitting wrongdoing.

Investors sued BDO in 2017, but the U.S. District Court dismissed their claims. The Second Circuit upheld the dismissal on appeal, but not because the auditors did their job. Instead, the court ruled that the audit opinion was “so general” that “a reasonable investor would not depend” on it.

In other words, BDO’s audit report didn’t matter. It was immaterial!

The court said investors’ “claim that these statements were knowingly and verifiably false when made does not cure their generality, which is what prevents them from rising to the level of materiality required to form the basis for assessing a potential investment.”

Therefore, BDO couldn’t be sued for issuing a fraudulent audit opinion. 

It’s ironic, considering that the function of auditors is to determine materiality. But more importantly, this decision raises a serious question for auditors: Does this mean all audit opinions don’t matter? 

The court didn’t go that far, limiting its ruling in that regard to this specific case. But it’s a worthwhile question to ask. Billions of dollars are spent on financial statement audits annually. In 2023, Deloitte alone generated some $20 billion in revenue from its assurance segment. Companies pay that cost, passed on to customers with higher prices and investors with lower returns.

More important, it symbolizes a profession that has squeezed out judgment and meaning from auditors’ work. Regulators have turned audits into commodity pass/fail assessments by mandating strict audit standards and generic reporting. As long as a company gets a “clean” opinion from auditors, everything is assumed to be OK — even if serious issues exist below the surface.

Such a standardized audit regime saps the profession of any meaningful impact. Auditors check boxes to say that a company narrowly complies with accounting rules. There is little room for professional judgment or making a difference by uncovering and addressing critical risks.

Worse, auditors have to deal with unending ethical conflicts. Auditors are under constant pressure to issue unqualified opinions despite any reservations because they are hired and paid by the companies they audit. And when audits are pass/fail, there’s no incentive to do high-quality work. You make more money when you do the bare minimum.

The result is low-quality audits that receive a low value in the marketplace because they are identical to the customer. It doesn’t matter who does the audit — just that you have one. And that is the root cause of the low wages in the accounting profession. Because audits are a commodity, auditors must compete on price. That’s what has put a cap on staff wages for decades.

Is it any wonder why fewer young people want to enter this profession? Two-thirds of accounting majors start as auditors. Long hours for low pay doing work that makes little impact does not make for an appealing start to your career. Even though the wider accounting industry is growing and thriving, university accounting programs are shrinking as fewer students opt into the audit career path.

It’s time both the profession and its regulators take a hard look at the value audits provide and what purpose auditors serve. We will only attract the best and brightest to safeguard financial reporting integrity by injecting professional judgment and impact into the work. The future relevance of the accounting profession depends on it.