“Going Concern” Opinions – How Many? How Many More?
Back on January 4th, I published a post highlighting the lack of “going concern” opinions that had been issued by companies’ auditors during the prior eighteen months. Given the number of near failures, forced mergers, bailouts, and bankruptcies that occurred especially in the prior nine months, it was surprising that none of the auditors saw the warning signs in advance and saw fit to warn shareholders and other investors.
The financial crisis was not sudden, it just accelerated quickly once the match, the Lehman failure, was lit. But there had been many mile markers along the way and many of the biggest failures have been problem children for a long time.
I had been tipped off in December by, of all guys, Tom Ray at the PCAOB. In a speech to the AICPA Conference, he implied that PCAOB expected auditors to take a stricter approach to evaluating these conditions and perhaps issuing more opinions. When the PCAOB says it’s coming, it’s pretty likely that they know something that we don’t.
“…I think it is reasonable to assume that more companies than in the past will exhibit one or more indicators of substantial doubt. If such indicators are present, I encourage you to engage in a dialog with your client’s management and audit committee about these matters as soon as possible.”
I set a Google Alert to warn me of any company announcements that include the dreaded auditor’s statement, “…raise substantial doubt about its ability to continue as a going concern.”
I started to see more of them trickling in.
Some people started making predictions.
On February 26th, Ed Nusbaum, CEO Grant Thornton, was interviewed by Reuters journalist Emily Chasan and predicted a deluge.
“I’m sure we will see a very high percentage — much higher than ever before — of companies receiving going concern opinions,” Ed Nusbaum, chief executive of Grant Thornton, said in an interview.
Auditors must make their decisions over the next few weeks, and Nusbaum, who heads the sixth-largest U.S. accounting firm, measured by revenue, said there is a risk that many will “get it wrong” this year.
“As we’ve seen over the last three or four months, markets can change so dramatically,” Nusbaum said. “There’s no doubt that many going concern opinions will be issued for companies that will survive, and likewise there will be companies that don’t get going concern opinions that won’t survive.”
Automaker General Motors Corp (GM.N) said on Thursday it expects to receive a going concern opinion from its auditors this year, but many more companies should also expect to receive such opinions, Nusbaum said.
While he did not have exact numbers, he said auditors have never before considered giving so many going concern opinions.
“So many companies are being dramatically impacted by the recession, whether it’s the fair market value of securities, or a slowdown in manufacturing or oil prices,” Nusbaum said.
Nusbaum said investors should expect a slew of going concern opinions in automotive, manufacturing, financial services and retail companies.
Nusbaum’s February 26th comments continued to be picked up by multiple media outlets.
The other publications started writing articles about the phenomenon after GM included a going concern opinion from its auditor, Deloitte, in its March 5th annual report filing.
On March 11th, Nusbaum was a panelist at the US Chamber of Commerce Third Annual Capital Markets Summit where he sat on the panel, “Promoting Transparency and Market Integrity.” Mr. Nusbaum seems to be the designated audit firm spokesperson on this topic. I suppose it’s an assignment as a member of the Board of the Center for Audit Quality, the lobbying organization for the audit industry.
Some saw the same thing I did and started making lists.
Unfortunately, even though many have predicted an increase in “going concern” opinions, and anecdotally it seems that the floodgates have opened on them, it’s very hard to count them.
A full text search for the phrase, “raise substantial doubt about its ability to continue as a going concern” on the SEC’s Edgar site last night resulted in more 8000 entries. There are twenty-four 10K’s filed today, March 30th, that include this phrase. When I checked yesterday, Sunday, the filing for RH Donnelley with a date of March 27th, caught my eye. I checked their company website and there was no press release on the main page or investor relations page. The 10-K had not yet been posted in their SEC filings section. Today there is still no press release but the 10-K appears under the SEC Filings tab from the front page only. It got me thinking about the ways that companies try to hide news like this – by not issuing press releases, by filing late on Friday or over a weekend, by not issuing a separate 8-K, for example.
Broc Romanek at the Corporate Counsel.Net, steered me to some guidance issued June 26, 2008 (How timely!) that gave companies another way to bury the news. CD&I 101.01 says, “Yes, a triggering event occurring within four business days before the registrant’s filing of a periodic report may be disclosed in that periodic report…” rather than a separate 8-K. So…Not only can auditors and their clients wait to identify a “triggering event” until a 10-Q or 10-K is about to be filed, but the actual opinion, buried in the auditors report, may be missed or foolishly disregarded as an accounting technicality, if it’s not a highly anticipated event at a spotlight company such as GM.
Of course, given that it’s annual report and quarterly report season for those with a December 31 year end, we will see these opinions come in bunches. But how to count them? How to know how big an increase we are now seeing versus last two years, for example? How to know whether auditors are taking the PCAOB’s admonition to heart? How to know whether opinions are disproportionately issued by one particular auditor and their problem child clients?
Good luck with that.
FM,
Love the Styx video! And congrats on becoming a Huff Post blogger! On your question of ‘how to count them,’ there’s currently a cottage industry in that niche, at least one such firm is Audit Analytics, whose website says http://www.auditanalytics.com/0002/audit-compliance.php : “Leading accounting and financial institutions rely on our audit and compliance data… [including] 5 regulatory bodies.” Their reports track, among other things, going concern opinions. Separately, maybe someone familiar with the XBRL taxonomy could provide some insight as to whether a going concern opinion would be specifically captured/tagged as such.
@Edith Orenstein
Thanks Edith. Well, Styx is my generation. What can I say…
The problem with Audit Analytics is it not free. Shouldn’t there be a way to pull this info out of Edgar or, as Broc Romanek Tweeted to me earlier, for the SEC to require a specific filing like an 8-k for this event?
fm
As a passing matter – the Standaing Advisory Group of the PCAOB has on its agenda a panel discussion of Going Concern consideration at its meeting this Thursday
@fm 6:49 pm
On the one hand, I generally believe that any additional data is good data. On the other hand, what exactly would we learn from the number of going concern opinions by firm?
Does it tell us that the firm issuing more going concerns is more rigorous, or that it has crummier clients?
In the end, who would use the information? The only group I can think of is plaintiff’s attorneys who are scouting for someone to sue. If you are an investor with a legitimate interest in the company’s status, wouldn’t you be reading the K’s and Q’s?
Anonymous Auditor @ 6
Not FM (obviously) but I think the point was the timing. Are the auditors analyzing the financial condition of their clients and, when appropriate, providing useful and timely warning of potential financial issues to the shareholders and investor community? Or, as I suspect Fran would assert, are they waiting until the conditions are so obvious they can no longer be credibly denied before issuing the going-concern warning?
When one has information regarding which firm is issuing a going-concern opinion to which client, and when that opinion is being issued, then one can match that information to other objective information and metrics, such as balance sheet and financial ratios, debt rating, and market conditions. That would give one a decent yardstick toward determining just how proactive, or how reluctant, the audit firms have been with respect to issuing the going-concern opinions.
— Tenacious T.
6% layoff in EY San Jose today after a 7 am conference call that lasted 45 mins most people didn’t even hear the news b/c they were put on hold to get into the conference call. Sad.
Going concern is an assessment I would have a problem reporting. It’s like being a doctor and informing a patient they have a terminal illness. Even if all the evidence points that way, I would always be haunted wondering if I truly ran the last stake through their heart. And, if they survived despite my predictions, I would appear quite foolish, although relieved.
@Oversight For The Better
I suspect that your “It’s all about me” sentiments are shared by many in the profession. Unfortunately, the Type II error is even worse as PwC may find out with Conseco – Deliberately not making the call and having the company fail anyway. http://twitter.com/retheauditors/statuses/1426301866
Francine, it was really cool to see you get quoted by the WSJ, keep up the good work. http://online.wsj.com/article/SB123860415462378767.html#mod=rss_whats_news_us
@John @ Illinois
Thanks so much for noticing my WSJ quote. It’s pretty neat.
Francine