If a company goes out of business, how will investors recoup their investments? How will lenders recover their loans? How will suppliers collect their accounts receivable? And how are CPAs affected by this?
While companies that operate in todays troubled economic times face challenges, CPAs who provide audit, compilation, and review services for their clients also face difficult issues.
Frequently, investors, lenders, and others who do business with companies in the red expect a CPA to send up a red flag when there are problems with its continued viability. In fact, financial statement users who have not been adequately warned often sue a failed businesss accounting firm when its client company declares bankruptcy. Why? Because many times, the companys CPA is the only one left with money. The CPA firm (and its malpractice insurance carrier) has deep pockets, especially in comparison to the failed client.
But the good news is that CPAs have a process that can protect them from lawsuits, even when a client goes into bankruptcy and cannot pay its bills. First the CPA firm has to identify that the client may not survive, and then it has to report the financial problems so that investors, lenders and others who do business with the company will know how serious the problems are. To use the vernacular of the profession, the CPA must assess a clients ability to continue as a going concern, and then, with the help of the clients financial employees, ensure that financial statement users are adequately informed about the clients financial problems.
Some financial pundits believe that the recession we have been experiencing is over. In fact, the main headline in The Wall Street Journal on Oct. 30, 2009 was Economy Snaps Long Slump. The article noted that the countrys gross domestic product showed a 3.5 percent rise in the quarter ended September 30 the first rise in more than a year. But on that same date, the countrys unemployment rate was at almost 10 percent, and the Dow plunged almost 250 points.
Clearly, the economy is still weak, and nobody experiences this more acutely than small companies and their CPAs. Although the need to assess a clients ability to continue as a going concern is not new, it is increasingly important in todays economy. More small businesses are struggling financially and more going concern problems are being reported now than at any time in recent memory. A recent article in Entrepreneur Magazine stated that according to Equifax (a small business consultant), U.S. small business bankruptcy rates increased 81 percent from June 2008 to June 2009. During that time, more than 10,000 small businesses failed.
So in the world of not only best practices but must practices, it is now crucial that CPAs properly assess each clients ability to continue as a going concern. The CPA firms professional reputation (and even its ability to continue in existence) may well depend on how well it assesses a clients continued viability. One of the worst things a CPA firm can do is give a clean unqualified opinion to a company that subsequently fails.
Cliff Griffith, CPA, is vice president of product development at Thomson Reuters.
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