Much Concern Over Going Concern
November 20, 2008 by Lela Davidson
Filed under Finance
With the economy in turmoil and the U.S. auto industry using words like bankrupt and restructure, doubt grows every day about whether or not companies are operating as a ‘going concern’. This accounting term simply means that the business is expected to continue into the foreseeable future.
Of course we can’t really predict the future of any company so we have regulations. The rules state the a company is not a going concern if management plans to liquidate the entity or cease operations, or has no realistic alternative but to do so. Since the future is a long time, the standards also provide a time horizon.
The rule as it stands is limited to one year beyond the date of the financial statements. However, in October the the Financial Accounting Standards Board (FASB) issued an Exposure Draft on Going Concern and Subsequent Events. In it they propose deeming a company as a going concern by considering all available information about the future, which is at least, but not limited to, 12 months from the end of the reporting period. It’s got people talking.
- Howard Wolosky at WebCPA predicts lawsuits for accounting firms in the next six months filed by disgruntled investors and creditors. Professional liability insurers are getting the word out to practitioners about how to protect their firms. While he expects the Big Four will be hit, regional and smaller firms won’t be spared. All this will lead to more sophisticated risk management analysis on audit, compilation, and review engagements.
- Dan Meyer at Tickmarks points out that the change is intended to bring US Generally Accepted Accounting Practices (GAAP) in accordance with international standards, and wonders what we’re giving up in the bargain.
- Dave Tate questions GM’s whether or not companies (like GM) begging for a piece of bailout pie are not branding themselves as no longer a going concern. And once you’ve told the world you’re about to run out of cash, what’s the auditor’s responsibility?
It makes you consider just how much our economy is built on optimism.
The FASB proposals are open for comment until December 8th.
