Next month, listed companies will simultaneously announce their business reports from last year. A business report is a document that explains the results of operational and financial activities over the past year to shareholders. This report also includes the opinions of external auditors, which can assist in making investment decisions. Here are four key points investors should pay attention to in business reports.
The first is the audit opinion. The audit opinion is a statement from the external auditor indicating whether the company’s financial statements are properly presented in accordance with accounting standards. The audit opinion is categorized into four types: ▲ unqualified ▲ qualified ▲ adverse ▲ disclaimer. The audit opinion is a judgment on whether the financial statements have been prepared in accordance with accounting standards, and it does not guarantee management performance or financial soundness. Just because it is 'unqualified' does not mean one should feel reassured.
However, one must be cautious of adverse opinions (qualified, adverse, or disclaimer). Metal manufacturing company TERA SCIENCE received a 'disclaimer' audit opinion in its business report last year. The external auditor, Samjeong Accounting Corporation, noted that they could not obtain sufficient and appropriate audit evidence to determine the validity of transactions and the appropriateness of accounting treatments related to the investments and lending of the consolidated entity. Currently, TERA SCIENCE is in a suspended trading status.
It is unlikely that a listed company that does not submit accounting materials to external auditors can operate transparently. In the past five years (2020-2024), 91% of the reasons for the delisting of companies in the domestic stock market were due to 'inadequate audit opinions.'
The second point to note in the business report is the key audit matters. Key audit matters are the most significant issues identified during the audit of the financial statements after consulting with the company’s governing body (audit committee). Areas with high audit risk, estimates involving management judgment, and significant transactions or events are typically selected. Key audit matters help identify important accounting issues of the company that should be examined carefully when analyzing the company’s financial condition and operating performance.
Looking at Samsung Electronics’ business report from last year, key audit matters included ▲ the assessment of net realizable value of memory semiconductor inventory ▲ the accuracy and completeness of sales deductions related to merchandise and sales incentives. The details related to key audit matters are also documented in the notes to the financial statements, which provide more comprehensive information. However, a large number of key audit matters does not necessarily imply that the company's management risk is high or that its management condition is poor.
The third point is the presence of 'going concern uncertainty' disclosures. Going concern uncertainties refer to situations that may adversely affect the premise of the going concern assumption upon which the financial statements are prepared. Commonly, this includes a lack of liquidity or capital impairment. The Financial Supervisory Service sometimes advises avoiding companies that disclose going concern uncertainties, even if their audit opinions are unqualified. However, the absence of mentions regarding going concern uncertainties does not guarantee the company's ability to continue as a going concern.
The last point is emphasis matters. Emphasis matters do not affect the audit opinion but provide information that aids in understanding the items presented in the financial statements. Key emphasis matters typically include ▲ significant transactions such as those involving related parties ▲ changes in the business environment and governance structure due to mergers ▲ changes in accounting policies ▲ significant uncertainties such as lawsuits.
Emphasis matters contain information that could significantly impact the company’s financial condition and operating performance in the future. Through this, investors can identify the risks to which the company is currently exposed. The related information is also documented in the notes to the financial statements, providing detailed insights when examined alongside the notes.