Monday, January 02, 2006
Doubts about doubts about going concerns
The rules for auditors regarding when to express doubts about the audited company as a going concern are covered by the document SAS No. 59. The amended version of SAS (Statement on Auditing Standards) No. 59 is issued by the Auditing Standards Board. As far as I know that means it is officially "designated" by the AICPA. If so that would make SAS 59 the most authoritative "Category A" GAAP... or perhaps it would be classified as GAAS (Generally Accepted Accounting Standards). Due to Sarbanes-Oxley Act of 2002, the activity of auditing is overseen nowadays by the Public Company Accounting Oversight Board. Just how many of these goddamn groups of "authoritay" do we need?
Here's an auditing dictionary. Ok, down to basics....
This article talks some about SAS 59. Start with the sidebar which says this:
- An auditor's responsibility to evaluate whether an entity is a going concern is for no more than 1 year from the date of the audited financial statements.
- Auditors are not responsible for predicting future events.
- Even if a company goes bankrupt in less than 1 year doesn't mean the auditors were negligent (obviously).
- Auditors are not required to perform specific procedures to determine if an entity is a going concern. The normal audit procedures are sufficient.
- If an auditor concludes doubts about the company as a going concern, they are required to evaluate management's plans to deal with the problems.
- If an auditor concludes doubts about the company as a going concern, they must consider the impact on the financial statements, to determine the effect on the audit opinion. I'm sure there are people who understand how this translates into some guideline of action. I'm not one of them.
- There are specific documentation requirements (adding the "doubts" text to the audit opinion, for instance).
Documenting compliance with SAS 59
Going concern issues for pension plans which has some interesting stuff in it.
Because the "going concern" qualifier is so fuzzy, it's probably a good way to evaluate an auditor: look at a large sampling of companies they audited and whether they had doubts about each one as a going concern vs whether I would have doubts myself.