Planning engagements with going concern issues
By Larry L. Perry, CPA
Here are some practical questions accountants and auditors may wish to incorporate in the planning documentation of every audit and review engagement for the foreseeable future.
- Does the accountant's or auditor's understanding of the client's business and industry reveal any information contrary to the going-concern assumption? Such information may include current and expected recurring operating losses, cash flow problems, defaults on debt obligations, inability to obtain financing or renewals of existing credit lines, an industry significantly affected by the recession, customers and vendors with going-concern problems, decreasing assets valuations, statutory noncompliance, and external matters such as lawsuits, loss of franchise, dealership or licenses, etc.
- Does management have any concerns about the entity's ability to continue in business for at least a year or possibly longer?
- What are management's plans to mitigate any revealed threat to continued existence?
- Are management's plans realistic and are they capable of carrying them out?
- What procedures will be necessary for the engagement team to evaluate management's plans to overcome going-concern problems?
- What effects are the going-concern issues likely to have on the basis of preparation of the entity's financial statements?
- What effects are the going-concern issues likely to have on the accountant's or auditor's report?
The FASB is still deliberating on its proposed statement, Going Concern, which was issued 10/9/08. The planning suggestions above will facilitate compliance with the final SFAS and with existing SAS No. 59. You can download a copy of the proposed statement from the Exposure Drafts section of the FASB Web site.