Tips and Topics

CPA FIRM SUPPORT SERVICES TECHNICAL ALERT
Concern About Going Concern!

As the effects of the widening economic recession on businesses and other organizations become more apparent with the news of each day, many CPAs are increasingly concerned about some of their clients. One practitioner shared that he is concerned about not only the obvious effects of the economic downturn on his clients but is extremely concerned about the effects on their customers, suppliers and lenders that may not be readily apparent. These concerns are important considerations for planning every year-end engagement. After a brief summary of the FASB’s exposure draft, Going Concern, we’ve included several considerations that may be crucial for all calendar year-end and future engagements.

FASB Exposure Draft

The FASB has issued an exposure draft, Going Concern, which can be downloaded from the Exposure Drafts sidebar on www.fasb.org. We recommend you provide a copy of this exposure draft to all audit and review engagement personnel in your CPA firm. The objective of this proposed Statement is to (1) provide guidance on the preparation of financial statements as a going concern and on management’s responsibility to evaluate a reporting entity’s ability to continue as a going concern and (2) require disclosures when either financial statements are not prepared on a going concern basis or there is substantial doubt as to an entity’s ability to continue as a going concern.

It would apply to business entities and not-for-profit entities that prepare financial statements in accordance with generally accepted accounting principles (GAAP) and apply to both interim and annual financial statements. It may also be necessary to apply the contents of the pronouncement to financial statements prepared in accordance with an other comprehensive basis of accounting to prevent them from being misleading.

Proposed Significant Change

Existing guidance in SAS No. 59 requires an auditor’s consideration of the going-concern assumption for 12 months following an entity’s fiscal yearend. This proposed Statement would require that management of a reporting entity consider all available information about the future which is at least, but is not limited to, 12 months from the end of the reporting period when assessing whether the going concern assumption is appropriate. An accountant or auditor reporting on such financial statements would, of course, be responsible for evaluating management’s representations regarding the entity’s ability to continue as a going concern.

Presentation

The exposure draft requires management to assess the reporting entity’s ability to continue as a going concern. An entity is required to prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.

Management may identify information about certain conditions or events that, if considered in the aggregate, indicate there could be substantial doubt about the reporting entity’s ability to continue as a going concern. The significance of such conditions and events will depend on the circumstances, and some may have significance only when viewed in conjunction with other conditions or events.

If, after considering the information in the aggregate, management believes that there is substantial doubt about the reporting entity’s ability to continue as a going concern, management shall consider its plans for dealing with the adverse effects of those conditions and events and whether those plans will mitigate the adverse effects and whether they can be effectively implemented. Accountants and auditors reporting on financial statements and footnotes when there is substantial doubt about continued existence will be required to evaluate the adequacy and effects of management’s plans.

Footnotes Disclosures

When management is aware of material uncertainties about events or conditions that may cast substantial doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties in the footnotes to its financial statements, along with their plans to overcome the threat to continued existence.

When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the preparation basis and the reasons why the entity is not regarded as a going concern.

Our Planning Suggestions

Here are some practical questions you may wish to incorporate in the planning documentation of every audit and review engagement for the foreseeable future.

• Does our 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 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 threats to the continued existence of some entities may be more significant than any we’ve considered since the 1980s. Our audits and reviews will continue to be evaluated based on the effectiveness of our engagement planning and procedures. Identifying and evaluating going-concern issues must be an integral part of every engagement performed by CPA firms.

We’re Here to Help!

Our organization was created to assist CPA firms in all areas of accounting and auditing consulting. We can assist you with written answers to specific questions or we can perform independent reviews of your planning and/or engagement documentation. All planning and engagement documentation reviews include detailed inspection notes and suggestions for creating engagement efficiencies. For work done in our offices, our fees are:

• $99 per incident (an accounting, auditing or reporting problem or question)
  
• $199 per engagement for review of planning documentation
  
• $499 per engagement for a concurring or final review of all engagement documentation
  

We are also available for extended inspection engagements and efficiency reviews in your office for $1500 per day plus travel expenses.