Peter Bible, a partner-in-charge of the Public Companies Group at the accounting firm EisnerAmper, recently shared some thoughts about potential reforms for going concern warnings.
He views going concern warnings as basically after-the-fact excuses used by corporate leaders who are looking to point fingers when they didn't practice effective due diligence in whom to extend credit.
“You have to go really way back in time to the evolution of accounting and what going concern is all about,” he told me. “SAS 59, which requires the auditor to assess whether there is substantial doubt about continuing as a going concern was issued in I think 1989. Over the course of the Clinton administration and the Bush administration, the bankruptcy laws were amended several times. The market uses a going concern warning to mean that they are going to go into Chapter 11, but that’s not what that opinion is about. What it’s saying is that the basis of reporting assumes going concern and you stay on that basis until liquidation appears imminent. So even if a company were to file Chapter 11, that doesn’t assume the going concern basis is inappropriate. The qualification has evolved to whether or not you should be using what has been known as the historical basis of accounting.”
Bible believes it’s probably too late to put the toothpaste back into the tube. “To get it back in is close to impossible,” he said. “The world has evolved to where people say that’s signaling a Chapter 11 filing, but if you read the words literally, it says no adjustments have been made to reflect this uncertainty. Those adjustments would be to go to a liquidation basis of accounting, at which time you would get a clean opinion, which is acceptable under GAAP.”
A Chapter 11 filing does not necessarily result in an immediate liquidation, Bible noted. “In fact, part of the Chapter 11 process is a determination of whether the best course of recovery for creditors is to leave the company alive to restructure or liquidate it," he pointed out. "This determination should be with the company’s management as it goes to the basis of accounting. This should not be an auditor’s determination. Do auditors choose depreciation or inventory-pricing methods?”
Companies should constantly access the credit worthiness of their customers, Bible noted. “If they are waiting on an auditor’s going concern qualification to deny credit, they will not be in business for long.”