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Don’t forget to join me tomorrow, live, when you sign up for tomorrow’s ( January 6, 2009) star-studded lineup of litigation lawyers discussing the most important developments in securities litigation in 2008, and the look ahead to 2009. Go here to learn more and to register.
The webcast will feature several of the leading bloggers in the securities litigation and SEC enforcement world — Walter Olson (Point of Law; Overlawyered), Kevin LaCroix (The D&O Diary); Tom Gorman (SEC Actions), and Bruce Carton (Securities Docket). And me.
One of the things I’ll be talking about is “going concern.”
• Auditing fair value measurements;
• Auditing accounting estimates;
• Auditing the adequacy of disclosures;
• Auditor’s consideration of a company’s ability to continue as a going
• Additional audit considerations for selected financial reporting areas.
I have a special interest in the discussions around the auditor’s considerations of a company’s ability to continue as a going concern. There have been some spirited discussions of this concept here and on other blogs where I have commented.
On December 8, Edith Orenstein reported at the FEI Blog on this alert and also reminded us:
“…today is the comment deadline to FASB on its Exposure Drafts released Oct. 8 on Going Concern and Subsequent Events. FASB’s ED’s would move the guidance on these matters from the auditing literature to accounting literature or GAAP, with some changes. Only a few comment letters have been filed so far, here and here, which is not unusual prior to a comment deadline, although a FASB board member recently noted at a board meeting that some constituents have indicated it is difficult to respond to all matters open for comment at the current time.”
The audience for FASB Exposure draft on Going Concern is accounting policy decision makers at both the public and private companies that have a requirements to prepare financial statements according to GAAP. The primary change proposed is with regard to the time horizon over which an entity should evaluate its ability to continue as a going concern:
“…the Board decided to adopt the time horizon in IAS 1 (at least, but not limited to, twelve months from the end of the reporting period), instead of the time horizon considered in AU Section 341 (not to exceed one year beyond the date of the financial statements). The Board decided to use the time horizon in IAS 1 because it avoids the inherent problems that a bright-line time horizon would create for events or conditions occurring just beyond the one-year time horizon that are significant and most likely would have to be disclosed. It also would result in a convergent approach between U.S. generally accepted accounting principles and IFRSs.
considered in making the going concern assessment (all available information about the
on a going concern basis.
but not limited to, twelve months from the end of the reporting period…” seems an accountant standard-setter’s sleight of hand. But in this environment, one of “sudden” strains on liquidity, catastrophic and calamitous changes in capital markets conditions, it’s important for auditors, in particular, to evaluate audit risks that may have been previously identified but may have become become “suddenly” more significant.
The auditor’s evaluation includes considering whether the results obtained in planning, performing, and completing the audit identify conditions and events that, when considered in the aggregate, indicate there could be a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time.
It may be necessary to obtain additional information about such conditions and events, as well as the appropriate evidential matter to support information that mitigates the auditor’s doubt. Conditions or events that, when considered in the aggregate, indicate there could be substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time include –
If, after considering identified conditions and events and management’s plans, the auditor concludes there is substantial doubt, he or she should consider the possible effects on the financial statements and the adequacy of disclosure about the company’s inability to continue as a going concern for a reasonable period of time, and include an explanatory paragraph in the audit report to reflect this conclusion.”
If the auditor believes there is substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, the auditor should obtain information about management’s plans that are intended to mitigate the effect of such conditions or events, and assess the likelihood that such plans can be effectively implemented.Such considerations also may include the effect of federal assistance or participation in a federal program.• Negative trends – for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, adverse key financial ratios;
• Other indications of possible financial difficulties – for example, default on loan or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers,restructuring of debt, noncompliance with statutory capital requirements, need to seek new sources or methods of financing or to dispose of substantial assets;
• Internal matters – for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, need to significantly revise operations;
• External matters that have occurred – for example, legal proceedings,
legislation, or similar matters that might jeopardize a company’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; uninsured or underinsured catastrophe such as a drought, earthquake, or flood.
We saw clean audit opinions for all of the large banks and financial services institutions up to their demise.
“BankUnited Financial Corp., the holding company for the largest bank based in Florida, expects to lose at least $327 million in the fourth quarter and warns of “substantial doubt” of its ability to operate as a going concern if it fails to raise capital.
In a notification of late filing with the Securities and Exchange Commission on Tuesday, the Coral Gables-based parent of BankUnited (NASDAQ: BKUNA) also acknowledged that the SEC’s Miami office began an informal inquiry into the company in October…After signing a cease and desist agreement with the Office of Thrift Supervision in September, BankUnited has been working with federal regulators, who placed restrictions on its business practices and set a Dec. 31 deadline for the bank to raise its capital-to-asset ratios.
BankUnited, which previously said it was seeking $400 million, continues to seek more capital through an asset sale or an equity investment. The bank stated that if it does not raise the money by the end of the year, it doesn’t expect to meet the capital ratio requirement and could face “various enforcement actions regarding the bank” from federal regulators.
“We are in negotiations with a fund to raise capital and restructure our balance sheet,” BankUnited stated in the filing. “We cannot assure you that these negotiations will be successful. If such negotiations are not successful, there is substantial doubt about our ability to continue as a going concern.”
Philip van Doorn, senior banking analyst for The Street.com Ratings in Palm Beach Gardens, said BankUnited faces significant challenges in raising capital. It would be unlikely to receive federal aid, and it is hard for a potential investor to evaluate the bank’s finances when it’s having difficulty preparing financial statements, he said.After losing $209 million over the first three quarters of its fiscal year, BankUnited’s holding company said it expects a loss of $327 million in its fourth quarter ended Sept. 30. That loss would be greater than the $261.6 million loss its BankUnited savings and loan subsidiary reported to the Federal Deposit Insurance Corp. for that quarter.
However, BankUnited cautioned that the holding company’s loss could grow “substantially larger” when it completes an analysis of how much it should reserve for loan losses to cover its payment option adjustable-rate mortgage portfolio.
Some interesting items from the 10Q as of March 31, 2008:
“At March 31, 2008, non-performing assets totaled $682.0 million, as compared to $208.6 million at September 30, 2007. Expressed as a percentage of total assets, non-performing assets were 4.75% as of March 31, 2008 as compared to 1.39% as of September 30, 2007. Non- performing payment option loans increased from $149.7 million at September 30, 2007 to $512.3 million at March 31, 2008, representing 85% of the total increase in non-performing loans. The increase in the level of non-performing assets is impacted by the downturn in economic conditions and housing markets, particularly in certain geographic areas that have suffered price decreases. The overall level of non-performing assets is expected to continue increasing during fiscal 2008…. “
“Real estate acquired through foreclosure has increased from $729,000 at September 30, 2006, to $27.7 million at September 30, 2007 and $73.4 million at March 31, 2008. The increase over this period is reflective of the increased levels of residential loan defaults noted throughout the nation, and especially in Florida. The Company expects loan defaults to continue and possibly increase for the remainder of fiscal 2008 and into fiscal 2009, resulting in further additions to REO.”
“Forty-eight years old Humberto L. Lopez, CPA has served as our Senior Executive Vice President from 2001, and Executive Vice President of Finance from 1999 to 2001. He has also served as our Chief Financial Officer and the Bank’s Chief Financial Officer since 1999. He was previously a Director from 1998 to 1999 at PricewaterhouseCoopers LLP. Mr. Lopez also served as the Chief Financial Officer from 1997 to 1998, and the Regional Financial Officer from 1993 to 1996, of Barnett Bank, South Florida and its successor by merger, NationsBank, Inc. in South Florida. ” Mr Lopez has no published biography prior to 1993.
“On July 7, 2008, the Board of Directors of the Company appointed Mr. Lucious Timothy Harris, 52, as the Company’s Principal Accounting Officer, effective immediately. Mr. Harris has served as a Senior Vice President of BankUnited, FSB, the Company’s wholly-owned subsidiary, since May 2008. From 2002 to 2008, Mr. Harris has provided independent consulting services with a focus on accounting and reporting matters to financial institutions with total assets of approximately $100 million to $55 billion. From 2001 to 2002, Mr. Harris was chief financial officer at Hamilton Bank, N.A. in Miami, Florida. From 1987 to 1999, Mr. Harris served in several accounting and reporting capacities at Union Planters Bank in Miami, Florida, successor to Capital Bank. Prior to 1987, Mr. Harris worked in the audit division of Arthur Andersen & Co., certified public accountants, in Miami, Florida. Mr. Harris is a certified public accountant and obtained an undergraduate degree in accounting from Stetson University.”
These types of loans, where borrowers can pay less than the monthly accrued interest and let the balance grow, were major factors in the downfall of Washington Mutual and Wachovia Corp. this year…”
The external auditor for Bank United Financial is PricewaterhouseCoopers LLP. Why is it that they didn’t question their client regarding their lack of a going concern disclosure prior to December 16, 2008?
Thirty-nine year old Joris M. Jabouin, CPA was appointed Executive Vice President and General Auditor for the Bank in November 2004. He has served as Senior Vice President and General Auditor of the Bank since June 2003. He previously served as Vice President and Head of Audit for Dresdner Bank Lateinamerika, AG, Miami Agency from 2000 to 2003. Mr. Jabouin was a Senior Auditor with PricewaterhouseCoopers LLP from 1998 to 2000 and was an Auditor with Price Waterhouse LLP from 1996 to 1998. He was also an Associate Examiner with the Federal Reserve Bank of Atlanta from 1993 to 1996.