Discussion:Going Concern

Liabilities far exceed assets and there is a multi-million dollar loss this year. The closely held company has been kept afloat with large loans from the two shareholders who are related to one another.

We are trying to determine what, if anything, needs to be disclosed regarding going concern. For example, if the shareholders are willing to infuse more cash into the company, does this negate the need for going concern disclosure? SSARS No. 1 says that "an accountant should not include an emphasis paragraph in a compilation report on f/s that omit substantially all disclosures unless the matter is disclosed in the financial statements." Does this mean that we need a selected footnote on going concern?

Thank you for your help!

I did a compilation similar to this one. The client received a foreclosure notice regarding one of its main assets. I did include a going concern note to the statements and modified my report accordingly because I wanted to make sure that readers understood the entity might not be around a year later.

When the opposing attorney asks you why you did not. What are you going to say?

I originally wanted to add modification to the report but if you read guidance it states that you are prohibited from including in your report an emphasis of a matter not disclosed in the financial statements (paragraph 55 AR 100)(except the basis of accounting if not GAAP). Additionally, interpretation 29 has the emphasis of a matter referring to a footnote for going concern. So then how do you add an emphasis of a matter when that matter is not in the financials? Going concern language would fall in a footnote and you have already stated that the footnotes are omitted and that the financials are not intended for those not informed of such matters. My situation was just an interim compilation where we had issued a review with a going concern emphasis and the third party in our situation had already received that report. If you are truly worried about the implications to third parties then refuse to issue a non-disclosure compilation when going concern issues exist. That way the full picture is laid out with a complete disclosure.

AR Section 100 paragraph 72 is pretty clear on the matter:

.72 The accountant may emphasize an uncertainty about an entity's ability to continue as a going concern provided the uncertainty is disclosed in the financial statements. In such circumstances, the accountant should follow the guidance in paragraphs .54–.55. [Paragraph added, effective for compilations and reviews of financial statements for periods ending after December 15, 2008, by SSARS No. 17.]

This does get into the scenario of if the financials would be misleading if you didn't have that disclosure. If you think so then you would have to require the disclosure or not issue a report. This is obviously a scenario where you should be careful with your conclusions and have excellent conclusions. I generally don't think that non-disclosure financials are a good idea for third party use - especially when there would be disclosures about significant uncertainties.

Have we not learned anything?

Natalie and Roy - (I'm not trying to be antagonizing here - I'm just interested in your opinions) Where would you draw the line on your limited notes or modified report? What if the client has a significant operating lease that, if booked as a liability, would significantly alter their debt / equity position? Should you include a note regarding that in non-disclosure compiled FS? Or a significant revenue concentration? These questions make me wonder if issuing non-disclosure compilations that aren't restricted for management use only should potentially be discountinued.

As far as your question about where to draw the line, I can't say. That would need to be taken on a case-by-case basis. Perhaps if I knew the statements were going to a bank for a new loan and I knew some commitment would be important for the banker to know about, I might include it. I can see how providing selected notes might cause problems, too, however. Why is one note chosen for disclosure and not another? It all has to be weighed with the current facts and circumstances.

I think I should clarify something. The modification to the report only states that a selected note is included with the statements. There is no going concern emphasis paragraph as there is with an audit.

Think Enron, 1136 Tenants, McKesson Robbins, and on and on.

Natalie know hers stuff IMHO.

BTW, I see your key board is acting up again.

My opinion is that non-disclosure statements are just that. If you start to include notes because you judge they are needed, do a full-disclosure statement. Yes, they are more expensive to the client. However, I think you open yourself up further by selecting notes you feel are meaningful and, thus, begging the question later in court "why didn't you disclose this (fill-in the issue that actually went sideways)?" Just my two cents.

This is an interesting point. In our case, the very wealthy shareholders have been infusing the company with cash. If they are willing to continue to do this, does this mean that we do NOT have a going concern issue?

If there is a going concern issue are not the financial statement are to be prepared to reflect liquidation values and not on the accrual basis?

My research indicates that the CPA must determine that the omission of the disclosure(s) was not untented to deceive the users of the financial statements.