Audit opinion red flags: ET Prime Special Series - Part 2: How auditors try to tell you about hidden liabilities & corporate governance issues in companies
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Synopsis Think of a financial statement as a mirror. The job of that mirror is to show everything as it is, with all the wrinkles, blemishes, and scars. But what if someone quietly and cleverly covers these up? The reflection suddenly looks better than reality. That is what happens when expenses and liabilities go unrecorded or unrecognised. Every rupee of expense left out makes profit look bigger, and every liability skipped makes equity appear stronger. When auditors notice this, they cannot stay silent. They modify their opinion, effectively telling you: “This picture might be looking prettier than reality.” Let’s start by going back a bit. To school. Class 11 commerce students are taught the “principle of prudence”: Anticipate all likely losses, but never anticipate profits. In practice, prudence means recording expenses and liabilities as soon as they are likely to happen in the near future, even if the exact amount is not yet clear....