Strengthening Financial Reporting: An Essay on Expanding the Auditor’s Opinion Letter

Users of financial statements, foremost of which are investors, have a voracious appetite for information that better enables them to assess the financial position and performance of the reporting firm. Even though financial statements purport to address their needs, because the statements, which are prepared by the firm’s managers, conceal a range of managerial estimates, assumptions, judgments, and choices, investors are deprived of the most fundamental kernel of information they seek, namely the overall quality of the financial reports themselves. In this Article, the author sets forth several modest steps that would enhance the overall quality of financial reporting by discretely tinkering with the outside auditor’s opinion that accompanies the financial statements. Specific areas addressed are: (1) the auditor’s engagement, if any, in evaluating management’s mandated assessment of internal controls; (2) the duration of the auditor’s relationship with the audit client; (3) whether the auditor concurs in management’s assessment of the critical estimates, judgments, and assumptions that underlie the financial reports; and (4) the auditor’s assessment of whether the firm is experiencing financial distress or the early signs of financial distress. The author then develops why each of these steps would greatly improve the quality of financial reporting so that all users of financial reports, including even the management team that prepared the reports, would be better served