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Monday, January 02, 2006

Doubts about doubts about going concerns

Auditing a company normally means treating it like an ongoing business and not as a pile of assets that will be liquidated. These two ways of looking at a business will result in two very different conclusions. An auditor might be treating an audited business as a going concern, but in some cases, it may be fairly obvious that the business is unlikely to continue as a business, barring some miracle. So the auditor needs some guidelines to know when to bring this up as an issue.

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:
  1. 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.
  2. Auditors are not responsible for predicting future events.
  3. Even if a company goes bankrupt in less than 1 year doesn't mean the auditors were negligent (obviously).
  4. Auditors are not required to perform specific procedures to determine if an entity is a going concern. The normal audit procedures are sufficient.
  5. 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.
  6. 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.
  7. There are specific documentation requirements (adding the "doubts" text to the audit opinion, for instance).
In addition to these, the absence of going concern doubt does not mean assurance to continue as a going concern.

Documenting compliance with SAS 59

Going concern issues for pension plans which has some interesting stuff in it.

As I've read through all the stuff on the subject, it's clear to me that this whole area of auditing is a huge mistake. Auditors should not be in the business of telling us whether the business is good or bad. They are suppose to tell us whether the financial statements reflect reality and if the accounting principles and estimates used by management follow GAAP. If I wrote the rules, I would say that an auditor only needs to express the doubts when auditing the company as a company clearly makes no sense.

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.

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