Blake Oliver asks whether
Oliver omits an important follow up.
What I find more interesting is the brief filed by BDO. While the firm is naturally trying to have the lawsuit dismissed, BDO seems to argue that the audit has no information content for the investment community.
BDO relies on the Supreme Court case Omnicare Inc. v Laborers Dist. Council Constr. Indus. Pension Fund, which governs statements of opinion. The court held that statements of opinion are not actionable except in three cases:
- They falsely describe the speaker’s state of mind;
- They contain embedded statements that are untrue; or,
- They omit material facts pertaining to the basis for the opinion.
BDO claims that appellants do not demonstrate any of these cases, so the case must be dismissed.
One should note that embedded in the audit report are the claims that the firm has followed generally accepted auditing standards, and the result is that the financial statements follow generally accepted accounting principles. These standards include tests to obtain reasonable assurance that they are free of material misstatement, including accounting fraud. Finally, the auditor claims that the description of their work omits no material facts and that the resulting financial statements do not omit material facts that investors need to understand the economic condition of the business enterprise. Accounting scandals will have one or more of these exceptions in operation.
Upon reading an unqualified opinion, investors are entitled to believe that the auditor has complied with GAAS, including the standards of competence, due professional care, independence and professional skepticism. Investors are entitled to believe that the financial reports are fairly stated and are free of material misstatements, including material accounting fraud. Further, investors are entitled to believe there are no material omissions pertaining to the audit report or to the financial statements.
Audit reports contain significant, material information. And this is true whether or not the auditor believes in their value.
This essay reflects the opinion of the author and not necessarily the opinion of his employer, The Pennsylvania State University.
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