From the June 2012 issue of Treasury & Risk magazine

Debate About Going Concern

FASB considers requiring management to assess whether there’s a risk the company could fail, rather than the outside auditor.

The Financial Accounting Standards Board (FASB), mindful of the large number of business failures that occurred in the wake of the financial crisis, has decided to revisit a controversial decision regarding the reporting of any “substantial doubts” about a public company’s ability to continue as a “going concern.” Traditionally, outside auditors have been responsible for sounding the alarm if there was doubt a company could continue to operate. But in 2008, FASB proposed requiring management to assess and report on that risk.

In comment letters at the time, the idea was criticized by two different contingents. Some critics opposed putting the responsibility on managers, and others warned that auditors would find it difficult to require management to make such an assessment if the company’s own accountants had not already raised the issue. In the end, FASB opted to leave the responsibility with the auditor.

Now a number of members of the accounting board have called for the issue to be reopened. At a May FASB meeting, board member Larry Smith, who previously opposed requiring management to report on going concern risks, said his views had “changed.”

In the wake of that shift in sentiment, the board could decide as early as this month to put the onus for going concern warnings on management, and not the auditor. (Any such change would require a new comment period, according to FASB.)

Chuck Evans, a partner at accounting firm Grant Thornton and head of its auditing principles consulting group, says he is glad FASB is going to reconsider.

“Management has to have the primary responsibility for assessing going concern issues,” Evans says, noting that auditors are tasked with looking backward and evaluating the quality and reliability of company’s financial statements, not looking ahead.

“This would be one of the few cases I can think of where auditors are being asked to look forward into the company’s future,” Evans says. “That is management’s responsibility. Management should always be looking forward, while the auditor looks back.”

In a January comment letter, Grant Thornton noted that company filings are already required to include “disclosures about risks and uncertainties” regarding the company’s viability, while outside auditors are responsible for checking that those disclosures comply with accounting regulations and “are not misleading.”

So the proposed change may take just one extra line, according to Grant Thornton, in which auditors would point users “to those relevant disclosures about risks and uncertainties, without a separate auditor evaluation” of going concern risk.



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