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The managements of business entities must make some fundamental assumptions before they issue financial reports for external users. If these assumptions are not substantiated, all of their financial reports will become misleading. In the authors' view, the credibility of the financial reports relies heavily on the validity of these assumptions, which is in agreement with FASB's guidance (Accounting Standards Update 2014-15, BC9).
The going concern assumption has been under scrutiny in large part due to the economic upheavals of the past decade. Business failures, such as General Motors (GM) and Lehman Brothers, and accounting scandals including Enron and WorldCom have cast doubt in the minds of the general public and regulators on the trustworthiness of financial reports issued by management and audited by CPAs. The accounting profession has been reevaluating its practices in financial accounting and auditing in order to restore the confidence of the general public.
In August 2014, FASB released "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" (ASU, ASC subtopic 205-40). The preceding exposure drafts of the guidance generated heated debates in respondents' comments. The fact that FASB has repeatedly tried to work out a new standard on going concern reveals the complexity of the topic.
Auditors ere required to follow Statement on Auditing Standards (SAS) 59 on going concerns, as updated by SAS 126, which is codified as AU-C 570. For public companies, the PCAOB grandfathered SAS 59 into its standards, which is codified as AU 341. However, PCAOB's investor sub-advisory group, in its "Going Concern Considerations and Recommendations," published March 28, 2012, was critical of tiie existing rules in AU 341. Furthermore, going concern is listed on the PCAOB's future standards setting agenda.
Outside the United States, business entities preparing financial statements must follow International Accounting Standard (IAS) 1 of International Financial Reporting Standards (IFRS), which includes a section about going concern. International auditors must also comply with International Standard on Auditing (ISA) 570 regarding going concern.
The objective of this article is to present the relevant issues surrounding the topic of the going concern assumption in financial reporting and auditing.
Conceptual Issues
Management's implicit assertion. Business entities usually possess long-term assets and long-term liabilities. The measurement and classification of long-term items require the validity...