Companies and their auditors must periodically assess whether there is substantial doubt about the company’s ability to continue as a “going concern.” In normal times, this evaluation at major public companies usually results in the conclusion that the company doesn’t face going concern issues. As a recent Gibson Dunn memo points out, however, these aren’t normal times, and going concern questions are on the front burner at many more companies than in years past.
The memo walks through the AICPA, FASB & PCAOB standards that apply to the going concern analysis, and the differences in the obligations imposed on issuers and outside auditors under them. It also addresses the implications that COVID-19 uncertainties may have for the analysis:
The list of adverse events set out in AS 2415 and Subtopic 205-40 that could potentially call a company’s viability into question includes items such as negative operating trends, work stoppages, and loan defaults. In some cases, the ultimate outcome of those events or circumstances will be uncertain at the time of management’s or the auditor’s assessment. The COVID-19 pandemic, however, raises a set of global uncertainties—concerning areas from public health to financial markets—whose complexity is an order of magnitude greater than that of the circumstances that may drive an entity’s going-concern analysis in normal times.
While Subtopic 205-40 requires only that an entity assess its ability to meet its obligations based on “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued,” and AS 2415 similarly requires only that the auditor consider “his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report,” both issuers and auditors should be aware that regulators and private plaintiffs will later assess their actions with twenty-twenty hindsight.
The memo says that in an environment like this, management and auditors should make, document and disclose their going concern evaluation process, the factors that could affect its ability to meet its obligations, and what is known and unknown about those factors and their implications. Finally, they need to make and document a good-faith assessment of how likely it will be that one or more of those factors will cause the company to be unable to meet its obligations during the relevant assessment period.
-John Jenkins, TheCorporateCounsel.net June 2, 2020
