Content area
Full Text
The going-concern assumption is universally understood and accepted by accounting professionals. Indeed, the assumption of a going concern is critical to the decision usefulness of financial information under the accrual basis of accounting. It is also the justification for valuing most assets at historical cost. It has, however, received little attention in the accounting literature and has never been formally incorporated into U.S. GAAP.
Even though users understand that management is responsible for the form and content of a business' s financial statements, there is no official guidance requiring management to assess their entity's ability to continue as a going concern. Currently, AU section 341 provides the only formal guidance in this area. This section states, in part, that "the auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time." If there is substantial doubt, an explanatory paragraph should be included in the auditors' report.
This responsibility often places an auditor in an uncomfortable position with clients. Research conducted by Audit Analytics reveals that, over a 10-year period (2000-2009), an average of 18.5% of all audit opinion letters included a goingconcern modification. This is about 2,950 modifications each year for SEC filers.
Auditors are about to get relief. Sometime during the first quarter of 2011, FASB intends to issue a Statement of Financial Accounting Standards, Going Concern. When adopted, this standard will leave no doubt as to who is charged with making the going-concern determination. Such responsibility will be clearly placed on management. But the going-concern assumption's journey into GAAP did not start with FASB. It started in the 17th century, as chronicled below.
Short History of the Going-Concern Assumption
As shown in Exhibit 1, the first documented use of the term "going concern" was traced by economist John R. Commons to a 1620 lawsuit in which the value of assets was in dispute. In this lawsuit, the court distinguished between a going-concern value and a value tantamount to the current concept of historical cost.
Following the 1620 case, the goingconcern idea remained mainly in the legal domain (primarily related to entity value determination) until 1892, when Lawrence R. Dicksee published Auditing: A Practical Manual for Auditors. As...