We Aren’t Getting What We Expect
Quality Enterprises Inc. issued its 2007 financial statements on February 22, 2008. The auditors expressed a “clean” opinion in the audit report. On July 14, 2008, the company filed for bankruptcy as a result of the inability to meet currently maturing long term debt obligations. Reasons cited for the action include (1) large losses on inventory due to overproduction of product lines that did not sell, (2) failure to collect on a large account receivable due to the customer’s bankruptcy, and (3) a deteriorating economic environment caused by a severe recession in the spring of 2008. Joan Stevens, a large stockholder with a large number of Quality shares, is concerned about the fact that a company with a clean audit opinion could have financial difficulty leading to bankruptcy just four months after the audit report was issued.“ Where were the auditors?” she inquired. In reply, the auditors contend that on December 31, 2007, the date of the financial statements, the statements were presented in accordance with GAAP. What is an auditor’s responsibility for protecting users from losses? Are auditors and investors in agreement on what an audit should provide?