US public company Ferro Corp. said in a May 18 SEC filing that KPMG’s audit report on their 2004 and 2003 statements were not adverse or even qualified reports. One wonders why they would go out of their way to make the claim.

Anyway, KPMG submitted a statement to the SEC yesterday that their audit report was indeed an adverse one, which is a serious issue. It means Ferro’s application of GAAP was faulty, and that their statements didn’t reflect fairly their financial position or the results of their operations for the periods being reported on.

From the AP article linked to above (emphasis mine):

“I don’t put much weight in what’s being discussed by KPMG,” said Deutsche Bank analyst David Begleiter. “To me these are largely immaterial issues that are being discussed and disputed by KMPG. I think it’s backward-looking.”

In no cases is an adverse opinion immaterial, much less “largely” immaterial. He might have a bit of a point if the report was only qualified, but it would depend on the reason for the qualification. He’s right that it’s backward-looking, but that’s sort of obvious now isn’t it, given we’re talking about 2004 and 2003 financial statements.

Ferro said earlier Monday that it named Deloitte & Touche as its auditor, a move Begleiter said should provide reassurance to investors. “The fact that Deloitte took them on as a client validates to a degree … the changes and improvements Ferro has made to their own internal controls,” he said. “They wouldn’t have taken on a client that they thought was in any way, shape or form suspect.”

Deutsche Bank does investment-banking work for Ferro.

So in other words, this guy’s got an interest in making Ferro look like it has its act together. And given his assessment of an adverse opinion as being “largely immaterial,” I would take what he says on internal controls with a grain of salt. Deloitte taking Ferro on as a client does validate to a degree the improvements Ferro may have made to their controls, but as an investor I’d rather have an unqualified audit opinion.