Posted by Maria T. Hurd, CPA
As a result of recent changes to the AICPA-approved language for audit reports, unqualified audit opinions will no longer confuse plan sponsors and service providers who associate the word qualified with compliance. New accounting pronouncements have changed the phraseology used to indicate the plan’s financial statements are not materially misstated from “unqualified opinion” to “unmodified opinion.” Unfortunately, they did not take the extra step to rename the “qualified opinion” as a “modified opinion,” so the changes only eliminated half the problem.
In the retirement plan space, the plan sponsor and its service providers collaborate to operate the plan to maintain its “qualified” status. In this context, the word “qualified” is a desirable goal indicating that the plan is compliant, fit, and competent to fulfill its given purpose based on specific requirements. Being “qualified,” in this case, is good.
In the case of plan financial statement audits, a “qualified” audit opinion indicates that a plan’s financial statements have been given a “qualified” approval, meaning that the opinion is “limited or modified” in some way. In fact, a qualified audit opinion indicates that something went astray with the qualified plan’s operations. Departures from Generally Accepted Accounting Principles (GAAP) can result in a “Qualified” or “Adverse” opinion, depending on the materiality and pervasiveness of the departure. In this case, receiving a “qualified” audit opinion is actually not good at all.
Such is the conundrum that causes plan sponsors to gasp when they hear that they will receive an “unqualified” opinion, which is actually a good result, and retirement plan practitioners in other fields to write articles referencing a “positive-qualified” audit opinion as a desirable goal. Unknowingly, advocating for “positive-qualified” opinions is an oxymoron akin to wishing your friend a “terminating promotion.”
The dichotomy in the Webster definitions of the word “qualified” affects qualified retirement plans in a unique way. The new standards solved half the problem by replacing the term, “unqualified opinion,” with “unmodified opinion.” To address the other half, education of clients and service providers must continue, with the goal of spreading the true meaning of audit-specific terminology. To that end, we will dedicate upcoming blog posts to explaining financial statement audit opinions, what they mean, and what information they cover.
With more education, clients and service providers will all understand that they must keep their qualified plans qualified, to avoid a qualified audit opinion.