The number of going concern opinions declined in 2014, but mainly because many of the companies identified as being in trouble by their auditors in previous years actually did go out of business.
The research firm Audit Analytics released its latest report on going concerns and found some not so cheerful results.
“An initial review of the data seemed to provide positive news, but a deeper analysis reveals a mixed bag of indicators,” said general counsel and director of research Donald Whalen. “The initial results appear positive because they show a drop in both the number and percentage of going concerns. Further analysis, however, reveals that most of the decrease is due to company attrition from the prior year’s going concern population (companies that disclosed a going concern for fiscal year 2013 that chose to subsequently file a termination with the SEC) rather than improvement in the population.”
The report analyzed “going concerns” in terms of “opinions qualified by an uncertainty regarding the going concern assumption.” Audit Analytics found some positive news when analyzing “new” going concerns, that is, going concerns filed for a particular fiscal year, but not the prior year. For fiscal year 2014, it estimated the number of new going concerns at 530, the fourth year in a row that the number was under 600.
“This streak is notable because the 10 years prior to 2011 all had numbers above 600,” said Whalen. “Moreover, it should be noted that 48 percent of the new going concerns as of July 14 were disclosed in S-1s or F-1s and thus linked to recent IPOs, not established companies. A new going concern linked to a recent IPO should not necessarily be viewed as a negative economic event.”
In contrast, Audit Analytics found some troubling results when the firm analyzed the number of companies that improved from the previous year.
“The number of companies that improved well enough to shed their going concern status is the third (tied) lowest population of companies observed during the 14 years analyze,” said Whalen. “This low number of improving companies indicates that many companies with going concerns are still experiencing difficulties and are yet unable to improve enough to shed the going concern status.”
A multi-year analysis of the going concerns allows for an identification of companies that filed a going concern one year, but not the following year. This cessation can occur for one of two reasons: either the company filed a subsequent clean audit opinion (subsequent improvement), or the company stopped filing audit opinions altogether (subsequent disappearance). A review of companies that experienced a subsequent improvement revealed that only 200 companies that filed a going concern in 2013 were able to file a clean audit opinion in 2014. This figure represents the third lowest (tied) for any year analyzed, since 2000.
For fiscal year-end 2014, the report estimated 2,233 going concerns, a decrease of 170 from the prior year, but the decrease was only 10 companies more than the 160 companies that ended up filing terminations with the SEC after disclosing a going concern in 2013. Audit Analytics concluded that nearly all the drop was due to company attrition from the prior year’s going concern population.
The firm estimated that 15.8 percent of auditor opinions filed for fiscal year end 2014 will contain a qualification regarding the company’s ability to continue as a going concern. In 2008, the figure was 21.1 percent. The percentage decreased for six consecutive years after that.