Interpreting company reports and accounts

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8. What to look for in the auditors' report

The auditors' report is noteworthy only if it is qualified. Qualifications are of three types:

1. Unable to check information
   The auditors may say that they were unable to check some of the information in the accounts. If the limitations on their audit were very important they may qualify their audit by saying that they are unable to form an opinion on the accounts.
2. Disagreement with accounting treatment
   The auditors may disagree with the accounting treatment of some item in the accounts - for instance whether a debt is collectable.
3. Not a true and fair view
   The auditors may disagree so violently with some item in the accounts that they feel the accounts as a whole do not give a true and fair view of the state of affairs.

Clearly any qualification makes a company less attractive from an investor's point of view.

A qualification of type 3 renders the company untouchable.

As for the other two, it depends on the severity of the qualification. On balance there has to be a presumption against investing in any company whose accounts are qualified, because there are lots of companies out there whose accounts are not qualified.

1. The five main components of a set of report and accounts 2. What to look for in the directors' report 3. What to look for in the P&L 4. Earnings per share (EPS) 5. Price earnings ratio (P/E) 6. What to look for in the balance sheet 7. What to look for in the cash flow statement 8. What to look for in the auditors' report 9. Other information sources 10. Conclusion