Going Concern Legal

Legal issues: Existing or potential lawsuits, regulatory and other legal issues could result in financial burdens that the company would have to overcome. If, in particular on the basis of the auditor`s review of management`s plans, the auditor concludes that material doubts as to the entity`s ability to continue as a going concern for a reasonable period of time have been removed, the auditor should consider the need to disclose the material conditions and events that led the auditor to believe that: that there were considerable doubts. The review of the information provided by the statutory auditor should include the potential impact of those conditions and events and any mitigating factors, including management`s plans. If the statutory auditor concludes that the information provided by the entity concerning the entity`s ability to continue as a going concern for a reasonable period of time is inadequate, there shall be a deviation from generally accepted accounting principles. This can lead to a qualified (except for) or negative review. For guidance on reporting in such situations, see Section 508, Reports on Audited Financial Statements. The Private Securities Litigation Reform Act of 1995 made it much more difficult for a plaintiff to successfully sue a company`s auditors. While the law codified SAS 59`s reporting obligations as law, it also made it harder for a plaintiff`s lawyers to successfully conduct class action lawsuits against accountants. In addition, in cases where the auditors did not change their opinion in accordance with SAS 59, the damages awarded were limited to proportionate liability.

When comparing the potential costs of providing a going concern opinion (accelerating customer decline, loss of audit fees) with the costs of not providing a going concern opinion (litigation), the outcome of the action was essentially the tip of the balance in favour of issuing a going concern opinion. Since the law was passed, high-profile litigation has been significantly reduced, citing auditors` inability to provide a going concern opinion, such as the class action lawsuits filed by Kmart shareholders against PricewaterhouseCoopers and Adelphias v. Deloitte & Touche. An entity is deemed to be a going concern if there is no material information to the contrary. An example of such conflicting information is an entity`s inability to meet its obligations at maturity without significant asset sales or debt restructuring. If this were not the case, a company would essentially acquire assets with the intention of closing its business and selling them to another party. [5] Another troubling reason why auditors may not provide a going concern opinion has been raised by the mainstream media in the commercial bankruptcies of WorldCom and Enron is the lack of auditor independence. The Executive Board shall determine the term of office and remuneration of the auditor. The threat of receiving a change in going concern can lead management to another auditor, known as “opinion buying.” Moreover, in the extreme case of a self-fulfilling prophecy, if the client goes bankrupt, the auditor loses his future audit fees. This fear of losing future fees could impair the auditor`s ability to make an impartial judgment on a client`s financial statements. Some red flags may appear in the financial statements of listed companies, indicating that a company will cease operations in the future. The listing of non-current assets does not generally appear in an enterprise`s quarterly statements or as a balance sheet item.

Quoting the value of non-current assets may indicate that a company is considering selling these assets. Accounting standards are intended to determine what an entity must disclose in its financial statements if there is doubt about its ability to continue. In May 2014, the Financial Accounting Standards Board determined that financial statements should disclose language that supports an entity`s substantial doubt as to going concern. Statements should also reflect management`s interpretation of the terms and conditions and future plans. Typically, an auditor reviews a company`s financial statements to determine whether they can continue for one year after the date of an audit. Conditions that raise significant going concern concerns include negative trends in operating results, ongoing period-over-period losses, defaults, lawsuits against a business, and supplier credit denial. Going concern is assumed to be the basis for financial reporting, unless the liquidation of the entity is imminent. The preparation of financial statements under this presumption is commonly referred to as the going concern basis. When the liquidation of an entity is imminent, financial statements are prepared on the basis of liquidation accounting (Financial Accounting Standards Board, 2014[1]). There are no specific procedures that an auditor is required to follow in arriving at a going concern opinion.

Rather, this information is derived from the sum of all other audit procedures performed. Indicators of a potential continuation problem are listed below. A company`s inability to meet its obligations without significant restructuring or asset sales may also indicate that it will not be pursued. If a company acquires assets during a restructuring, it may consider selling them at a later date. If, after reviewing the conditions and events identified and management`s plans, the statutory auditor concludes that there are material doubts as to the entity`s ability to continue as a going concern for a reasonable period of time, the audit report shall include an explanatory paragraph (after the audit paragraph) to reflect this conclusion. FN 4 (?) The auditor`s conclusion as to the entity`s ability to continue as a going concern shall be expressed using the phrase “material doubts as to the entity`s ability to continue as a going concern” [or a similar phrase that includes the terms “material doubt and going concern”], as set out in paragraph 13. [As amended, valid for reports issued after December 31, 1990, by Statement on Auditing Standards No. 64.] A company`s business continuity is presumed in financial reports if material information to the contrary is available. Generally, information that materially contradicts the going concern assumption relates to the entity`s inability to continue to meet its obligations when due without a significant disposal of assets outside the ordinary course of business, debt restructuring, forced external audits of its operations or similar actions. The going concern principle allows the entity to carry forward a portion of its deferred revenue to future accounting periods. [3] The going concern assumption is a fundamental assumption in the preparation of financial statements.

Under the going concern assumption, it is generally assumed that a company will continue to operate for the foreseeable future, without the intention or need for liquidation, cessation of business or protection from creditors under laws or regulations. Accordingly, assets and liabilities are recognised on an individual basis, unless the going concern assumption is unreasonable in the entity`s position, such that the entity will be able to realise its assets, meet its liabilities and (if necessary) receive refinancing in the normal course of business. [4] “Going concern value”. Merriam-Webster.com Legal Dictionary, Merriam-Webster, www.merriam-webster.com/legal/going%20concern%20value. Retrieved 9 October 2022. The loss or expiration of a key license or patent can have a negative impact on a company`s competitiveness and therefore be an indicator of a business continuity issue.