The financial crisis of 2008 shone a garish, bright light on the reporting shortcomings of some of the most powerful companies in the United States. With automakers, homebuilders, retailers and financial companies running low on cash and high on uncertainty, auditors worked feverishly to convince management teams to add footnote disclosures and clarifications about their clients' ability to continue operating as a "going concern" (i.e., a company that has the resources needed to continue to operate indefinitely).
Meanwhile, the majority of the companies filing for bankruptcy had not published any warning in their financial statements in the year prior to the crisis.
This financial upheaval stoked an ongoing conversation about who is really responsible for assessing and reporting about a company's ability to continue as a going concern. Should an external auditor be charged with making early-stage assessments of a client's financial viability, or should this responsibility lie with management?
Heretofore, the only guidance on this issue had been embedded in generally accepted auditing standards--the "rules" by which audits are performed. On June 26, 2013, the Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU) that may ultimately tip the scales toward management. However, questions remain about the proper implementation of such a standard, should it be approved.
The FASB proposal recommends that management be required to perform interim and annual assessments of their company's ability to operate as a going concern for a 24-month period. In addition to public companies, private companies and nonprofit organizations would also fall under the jurisdiction of this standard. This responsibility had previously been in the court of the auditor.
Unfortunately, U.S. GAAP does not provide any specific requirements to disclosing uncertainties with going concern, leading to many disparate methodologies and practices for assessing the nature, timing and extent of the entity's disclosures.
Under the FASB proposal, management would be required to disclose if it is apparent that the company is more likely than not (i.e., a likelihood exceeding 50 percent) to be unable to meet its obligations within 12 months or it is known or probable that it will be unable to meet its obligations within 24 months without proactive changes to its ordinary course of business.