Managers' and Auditors' Responsibilities for Evaluating Going Concern

• Author: Paul M. Clikeman
• DOI: http://doi.org/10.1002/jcaf.22319
• Date: 01 January 2018
• Published date: 01 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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