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.
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.