Going Concern Opinions Decline with Attrition

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Auditors filed fewer going concern opinions about companies last year, according to a new analysis of fiscal year-end 2012 filings, but that was largely due to company attrition rather than improved company performance.

An initial review of the data by the research firm Audit Analytics seemed to provide positive news, but a deeper analysis found reasons for pause, according to Don Whalen, general counsel and director of research. 

“The initial results appear positive because they show a drop in both the number and percentage of going concerns,” he wrote. “Further analysis, however, reveals that this decrease is due to company attrition from the prior year’s going concern population (companies that disclosed a going concern for fiscal year 2011 that chose to file a termination with the SEC).”

In addition, Audit Analytics found troublesome results when analyzing two other metrics: (1) the number of companies that improved from the prior year and (2) the number of new going concerns that appeared this year. “The number of companies that improved well enough to shed their going concern status is the lowest population of companies observed during the 12 years reviewed,” Whalen observed. “This decrease in improving companies happened while new going concerns experience an uptick compare to the year prior.”

The report on 2012 going concerns estimated that in fiscal year end 2012, 2,517 going concern opinions were received, a decrease of 127 from the prior year, but the decrease was smaller than the 228 companies that ended up filing terminations with the SEC after disclosing a going concern in 2011.

Audit Analytics estimated that 17.5 percent of auditor opinions filed for fiscal year end 2012 would contain a qualification regarding the company’s ability to continue as a going concern. During the 13 years under review, the highest percentage, 21.1 percent, occurred in 2008 and the lowest, 14.1 percent, occurred in 2000. The last six years represented the worst six percentages under review.

New going concern opinions that were filed for this year, but not the prior year, are estimated by Audit Analytics to be 543, which is low compared to most years, but 35 more companies than in the prior year.

Fiscal year 2012 also saw the fewest number of companies that improved well enough to shed their going concern status. A multi-year analysis of the going concern opinions allows for an identification of companies that filed a going concern one year, but not the following year. The report noted that this cessation can occur for one of two reasons: (1) the company files a subsequent clean audit opinion (subsequent improvement) or (2) the company fails to file audit opinions altogether (subsequent disappearance). 

A review of companies that experienced a subsequent improvement revealed that only 140 companies that filed a going concern in 2011 were able to file a clean audit opinion in 2012. This figure represents the lowest for any year analyzed, since 2000.

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