Attestation Update – A&A for CPAs

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Going concern articles for auditors

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FASB has issued ASU 2014-15 which brings going concern consideration into the GAAP literature. Here are three articles that helped me and I think you can learn from as well.

Professional literature

You can find ASU 2014-15 here.

You can find SAS 126 in AU-C section 570 here.

Current going concern rules in SAS literature

4/19/14 – CPA-Scribo –  Audits: Going Concern Issues – From a year ago, here is a great summary of going concern rules in SAS 126. I recommend you check out this post as a refresher on the rules.

New going concern rules in GAAP

11/6/14 – CPA-Scribo – The New FASB Going Concern Guidance – Great overview of the new ASU 2014-15 on going concern as discussed in GAAP literature. All auditors ought to check this out as a primer on the new standard.

Substantial doubt about going concern exists

…when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued).

Notice the probability cutoff of “probable.”

Effective for years ending after 12/15/2015. For most organizations, that means the 12/31/2015 financial statements.

I heartily recommend you bookmark both of those articles, or print a copy, or add to your Evernote file.

Before you dive into the details of SAS 126 or ASU 14-15 the next time you encounter a going concern issue, review those posts as your first step of detailed research. It will orient you before opening up Professional Standards or the ASC.

Now for some background commentary.

3/16 – Accounting Onion – The FASB’s New “Going Concern” Reporting Rules: A Solution in Search of a Problem – Current issues regarding going concern that Prof. Tom Selling doesn’t believe are addressed in the audit literature and also won’t be addressed by the new ASU:

  • Going concern comments miss lots of BKs -Between ’96 and ’02, 54% of the 673 largest public bankruptcies got a clean opinion in the most recent auditor’s report.
  • Not timely – The market has already incorporated going concern into stock price before the audit report is released.
  • Required discussion of liquidity in the MD&A provides info on going concern that is more detailed and more timely than the audit report, making the qualification redundant, per the prof.
  • The going concern comment can easily push a company, especially a non-public one, over the edge into bankruptcy. That has long been a concern in all the firms I’ve worked at – putting that comment out there will be the tipping point into bankruptcy.
  • Covenants agreed to by some borrowers (quite foolishly I think) say that a going concern comment is itself an event of default.

Article points out a different probability cutoff in ASU 14-15 compared to the SEC’s rules.

Lots more background in the article, including him pointing out this project started as an IFRS convergence issue. His analysis is the only reason for this project staying alive as long as it did was so FASB didn’t add one more abandoned project to the list of IFRS convergence failures.

Written by Jim Ulvog

March 17, 2015, 7:00 am at 7:00 am

Posted in Accounting, Audits

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