Managers' and Auditors' Responsibilities for Evaluating Going Concern

DOIhttp://doi.org/10.1002/jcaf.22319
Date01 January 2018
Published date01 January 2018
107
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22319
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Managers’ and Auditors’
Responsibilities for Evaluating
Going Concern
Paul M. Clikeman
Since 1981,
American audi-
tors have been
required to modify
the audit report if
they believe there is
substantial about the
company’s ability to
continue as a going
concern (American
Institute of Certified
Public Accountants
[AICPA], 1981). Dur-
ing and shortly after
the global financial
crisis of 2007–2008,
critics alleged that too
many auditors failed
to flag their
clients’ financial
vulnerabilities. Bar-
ro n’s columnist Jim
McTague (2011)
likened auditors’
performance during
the financial crisis to
watchdogs who never
barked. Anne Simp-
son, a senior executive
with the California
Public Employee’s
Retirement Sys-
tem ( CalPERS)
complained in
2012, “You have
to be dangling off
a cliff, hanging on
by your fingernails
before the auditor
blows the whistle”
(Chasan, 2012).
Prem Sikka (2009)
identified 28 Ameri-
can and European
financial institu-
tions that declared
bankruptcy or
required government
assistance within
months of receiving
unmodified audit
reports. Sikka said
auditors’ failure to
warn investors about
companies’ financial
risks raises ques-
tions about auditor
independence, the
economic incentives
for good audits, and
the knowledge base
of auditors.
During and shortly after the global financial crisis,
critics complained that too many auditors failed
to flag their clients’ financial vulnerabilities. Since
then, both the Financial Accounting Standards
Board (FASB) and the Auditing Standards Board
(ASB) have issued new standards increasing man-
agers’ and auditors’ responsibilities for evaluating
an entity’s ability to continue as a going concern.
Accounting Standards Update (ASU) No. 2014-15
defines substantial doubt, requires managers to
evaluate every reporting period whether there are
adverse conditions or events that raise substantial
doubt about the entity’s ability to continue as a
going concern, and specifies information to be
disclosed in the financial statements when such
adverse conditions or events exist. Statement on
Auditing Standards (SAS) No. 132 requires audi-
tors to assess the appropriateness of the entity’s
use of the going concern basis of accounting,
assess whether substantial doubt exists about the
entity’s ability to continue as a going concern, and
evaluate whether the financial statement disclo-
sures regarding going concern are adequate. Both
standards bring American accounting and auditing
practices into closer conformity with international
standards. © 2018 Wiley Periodicals, Inc.
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