During an audit, the auditor has always had a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. Auditing standards further defined a reasonable period of time as one year beyond the date of the financial statements being audited. The auditor’s evaluation would include situations such as:
· Negative trends—for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities;
· Other indications of possible financial difficulties—for example, default on loans or similar agreements, denial of usual trade credit from suppliers, restructuring of debt, noncompliance with statutory capital requirements, need to seek new sources or methods of financing;
· Internal matters—for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, need to significantly revise operations;
· External matters that have occurred—for example, legal proceedings, legislation, or similar matters that might jeopardize an entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; uninsured or underinsured catastrophe such as a drought, earthquake, or flood.
If, after considering the identified conditions and events in the aggregate, the auditor believes that there is substantial doubt about the ability of the entity to continue as a going concern, the auditor should consider management’s plans for dealing with the adverse effects of the conditions and events. The auditor should obtain information about the plans, and consider whether it is likely that the adverse effects will be mitigated for a reasonable period of time. The auditor should also consider whether such plans can be effectively implemented based on the adequacy of information supplied by management. The auditor’s considerations relating to management plans may include the following:
· Plans to dispose of assets
· Plans to borrow money or restructure debt
· Plans to reduce or delay expenditures
· Plans to increase ownership equity
In October 2008, the Financial Accounting Standards Board (FASB) issued a proposed standard addressing going concern that would require management to consider all available information about the future in order to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. In addition, the proposed standard indicates that a reasonable period of time is at least, but not limited to, one year from the date of the current financial statements. The FASB believes that since financial statements belong to management, management should be evaluating going concern related matters and the potential disclosures that are associated with going concern problems.
So now the standards are refined so that all information is considered while addressing the going concern of an entity. Why wasn’t this done before? Not refining the standard but looking at all the information surrounding an entity while analysing its going concern? Isn’t this something that should be normal?
The FASB believes that since financial statements belong to management, management should be evaluating going concern related matters and the potential disclosures that are associated with going concern problems.
Oh really……so before they belonged to the noobs who didn’t have anything to do with it!!!
The FASB is projecting to issue its final going concern standard in the fourth quarter of 2009, and that standard could be effective for the December 31, 2009 financial statements. Companies are encouraged to communicate early with their auditors to help avoid delays during the audit. The best way to avoid receiving a going concern opinion is to identify potential issues and establish a plan as early as possible. With the current economic conditions, many companies will be able to identify with at least one of the indicator situations mentioned above. Link Shawn
Going concern analysis has always been in place however this time some companies may actually have to create a plan and do more work to prove why it is a going concern. All thanks to ofcourse financial crises that made the "r" word common again.