Should Auditors Use a Formal 'Going Concern' Qualification More Frequently?

If one phrase in an auditor report will spook an investor that they haven’t seen before, it is the so-called going concern opinion. Many auditors do not like to issue these going concern notices because it can adversely impact their clients, and most auditor clients want to avoid being labeled as a going concern.

So what are you supposed to make of it when regulators and industry watch groups start telling auditors that they should be using the going concern warnings more frequently in their audit reports?

When a company receives a going concern qualification by its auditors, it generally implies that the company under question will have to either raise more capital or have a substantial change in its current business operations to avoid being torn apart by creditors at some point in the near future. That being said, some public companies have been able to operate with going concern qualifications for years and years.

The Public Company Accounting Oversight Board (PCAOB) has now issued a Staff Audit Practice Alert to remind auditors to continue to follow existing PCAOB standards when considering a company’s ability to continue as a going concern. The move follows recent changes to U.S. generally accepted accounting principles.

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The alert says that auditors should look to the applicable financial reporting framework (whether U.S. GAAP or International Financial Reporting Standards) to assess management’s going concern evaluation and the related financial statement disclosures. The PCAOB Chief Auditor and Director of Professional Standards said:

An auditor’s responsibility to evaluate a company’s ability to continue as a going concern is an important part of the audit. With the recent changes to U.S. GAAP, the staff is issuing this alert to make clear that current auditing standards remain in effect.

It is generally deemed that the PCAOB aims high on standards. That being said, some auditors lose clients after including going concern notices inside of auditor reports and filings.

More details were as follows:

The alert also makes clear that auditors should continue to look to the existing requirements of AU sec. 341 when evaluating whether the auditor’s report requires an explanatory paragraph disclosing the auditor’s substantial doubt about a company’s ability to continue as a going concern. It also notes that the auditor’s evaluation is qualitative based on the relevant events and conditions and other considerations set forth in AU sec. 341.

A determination that no disclosure is required under U.S. GAAP or IFRS, as applicable, is not conclusive as to whether an explanatory paragraph is required under AU sec. 341. Auditors should make a separate evaluation of the need for disclosure in the auditor’s report in accordance with the requirements of AU sec. 341.

Again, many companies have managed to operate with going concern qualifications in their annual reports for years. That being said, investors generally do not like to see these risks.

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