Remember what happened when Katrina hit the Gulf Coast? Communities became disaster areas. Local and national businesses could no longer produce. Katrina rippled through the economy across the nation! Entities in many other states with concentrations of customers and vendors in the Gulf Coast area felt the fury of her economic force.
Bank closures, economic downturns in various industries, cities and states teetering on the brink of bankruptcy, high unemployment with little recovery, investment bankers promoting risky and fraudulent schemes, out of control government spending, and businesses dying because credit lines are unavailable are all indications of what some have called "a perfect storm!" Now, an oil spill is threatening the livelihood of thousands in the Gulf Coast region again! As recent history has shown, these economic troubles often appear as quickly as a "thief in the night."
As I travel to present live seminars across the nation, CPAs from all sizes of CPA firms tell me their clients are feeling the effects of the times. Many CPAs, however, have learned to look for these "troubles" before the troubles find them. In the past year, some of my seminars and webcasts have focused on "going concern" issues, particularly in the area of audit planning. Not only are we looking at our client's operations to foresee possible going concern issues, we also should be looking at their customers and vendors. Concentrations!
We've always considered concentrations for footnote disclosures; bank deposits over insured limits, major customers and vendors, investments and key person life insurance are examples. It's time to drill deeper (no pun intended)!
Client concentrations in geographic regions, in certain industries, in city and state governments and in any organization that may be subject to current troubled economic and environmental events and circumstances should be on accountants' and auditors' "watch lists." Planning for future engagements, particularly audits and reviews, should include scrutiny and thorough investigation of any such concentrations.
Foreknowledge of significant concentrations helps accountants and auditors to ensure footnote disclosures are proper, to plan evidence collection strategies well in advance of engagements and to assist clients in taking action to resolve troubled situations before they occur. Investigation of concentrations may be one of our best defenses against the risk of material misstatement in audits and reviews. Post a comment and let us know how you're preparing for concentrations.