Going Concern Warnings Are Worthless

Just a few years ago, a number of companies failed, were rescued by competitors (if you can call it a rescue) while on the brink, or bailed out by the federal government. It was a pretty exciting time! One of the downsides of all this drama was that you, me, EVERYBODY lost a lot of money in the process and when people lose money, people get PISSED. And when people get pissed they want to blame someone or something and then take swift action to ensure that these offenders are wiped off the face of the Earth.

While there was plenty of blame to go around, it has been noted that the auditors of these companies – Bear Stearns, Lehman Brothers, AIG, Washington Mutual, Wachovia, are all fine examples – did not issue going concern opinions, warning about the possibility that their clients could go down for the dirt nap in the next 12 months.

These days, people are pretty sour on going concern opinions mostly they have more or less become useless since they come around about as often as Sasquatch:

“A going concern warning from an auditor is rarer than a hen’s teeth,” Anne Simpson, senior portfolio manager and director for corporate governance at the pension giant California Public Employee’s Retirement System (CalPERS) said at a roundtable meeting held by the International Auditing and Assurance Standards Board (IAASB) in New York this week. “You have to be dangling off a cliff, hanging on by your fingernails before the auditor blows the whistle,” she added. […] “What should be an extremely useful form of audit communication to capital providers, it seems to us is not being used,” Simpson said.

This after "experts" predicted an "unprecedented" number of disclosures back in 2009 only to be proven wrong by the data.

What does this all add up to? A whole bunch of people kicking around a whole mess of ideas:

The IAASB, which sets voluntary auditing standards used around the world, is considering expanding auditor guidance around the going concern opinion, and also around how auditors judge the material uncertainty that a company may be unable to meet its ongoing payment obligations in the ordinary course of business. At the roundtable to discuss the possible reform on Monday, some suggested management should make the assessment, similar to the way that managers judge internal control effectiveness under Sarbanes-Oxley, while others suggested auditors should make their opinions on a more frequent basis, or look over periods longer than 12 months. Both auditing rules and accounting rules about going concern opinions are in flux in the United States as well. In May, the U.S. Public Company Accounting Oversight Board’s standing advisory group looked at the issue, and the U.S. Financial Accounting Standards Board decided to revisit whether corporate managers should be required to make an assessment on their company’s ability to continue as a going concern.
In other words, expect your checklists to get longer.
 

 

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