The pandemic is the ultimate stress test for a company.
Recent high-profile bankruptcies have highlighted the importance of going concern assessments to auditors and investors.
Active investors must return to the basics of fundamental analysis in this and coming quarters.
By Sandy Peters, CPA, CFA
Continuing with our blog series, Second Quarter 2020 Amid COVID-19, Investor and Audit Committee Considerations (“Introduction,” “Cash Is Not Just King, It Is Everything”), this post covers the realty companies and their auditors face when considering the ability of a company to operate as a going concern. This post also addresses the fact that investors likely need to perform their own going concern analysis. Financial statements prepared using US GAAP and International Financial Reporting Standards (IFRS) are created based on an assumption that – very simply, not technically – the company has the ability to continue to operate as a going concern over the next 12 months.
Subsequent to the Great Recession of 2008/2009, during which companies failed rather quickly and dramatically just having received “clean” (i.e., unqualified) opinions, audit regulators globally and in the United States took a look at the rules surrounding going concern assessments and made some amendments. In 2014, the Financial Accounting Standards Board clarified management’s responsibilities with respect to going concern assessments under US GAAP and changed the paradigm that auditors have the responsibility for going concern assessments. To date, only US auditors had defined responsibilities related to going concern. Auditors seeking to preserve the “client relationship” were shy about challenging their client’s future viability. The US audit regulator, the Public Company Accounting Oversight Board, discussed and debated this topic but only issued Staff Guidance on the topic in 2014. Internationally, the International Auditing and Assurance Standards Board, revised its guidance on going concern assessments in 2015. For IFRS, the International Accounting Standards Board dropped the suggested consideration of changes to the disclosure guidance for going concern. Further dramatic failures in 2018 of companies like Carillion (OTCPK:CIOIF) – despite implementing the requirement to make a comment on going concern assessments following the financial crisis – caused the United Kingdom to further address the matter of going concern assessments and make further revisions in 2019. While changes have been made to the standards, the central concern for investors is whether these changes will result in enhanced reporting. The auditing profession remains keenly aware that stakeholders, including investors, are paying attention to their efforts and responsibilities on this issue, as a result of the pandemic.