{"id":1423,"date":"2021-01-21T09:39:15","date_gmt":"2021-01-21T08:39:15","guid":{"rendered":"https:\/\/eaa-online.org\/arc\/blog\/blog\/going-concern-not-point-range\/"},"modified":"2021-01-21T09:39:15","modified_gmt":"2021-01-21T08:39:15","slug":"going-concern-not-point-range","status":"publish","type":"post","link":"https:\/\/eaa-online.org\/arc\/blog\/2021\/01\/21\/going-concern-not-point-range\/","title":{"rendered":"Going concern is not a point but a range"},"content":{"rendered":"

It is more than year ago that Sir Donald Brydon published<\/a> his famous review where he introduced the notion of deserved confidence<\/em>. One of the most contentious elements of audited reports pertains to the going-concern opinion of auditors.  Auditors are scorned  if a company goes bankrupt despite the fact that the auditor gave a clean opinion on the financial statements.<\/p>\n

In about fifty percent of the cases, the auditor indicates that a company is financially sufficiently healthy to assume continuity, while the company in question still goes bankrupt. We saw this, for example, in the bankruptcy case of Carillion. This is a case of a false negative where the company is actually going bankrupt but the auditor has not pointed out that the firm might fail in the near future. This type of error (also referred to as a type II error) is heavily blamed on the auditor.<\/p>\n

In those cases where company management believes that continuity is certain, but the auditor has doubts, he must have the opportunity to express those doubts. To this end, it is useful if company management was to develop scenarios, indicating for each scenario to what extent it is likely that the company can continue its operations on its own. It is then up to the auditor to decide whether scenario’s and expected results are accurate and that the course of affairs will indeed take place within the intervals explained by company management. In most cases chances of survival cannot be stated in a black or white outcome as different conditions result in different chances of survival.
\n\tI would argue to relieve the audit for the duty to paint a black-or-white picture to indicate the chance of a company’s survival.  After all, in too many states it is uncertain whether the company can continue on its own. The focus of his and that of the company’s management should therefore be directed towards developing realistic scenarios of  how the company will fair under each scenario. These scenarios result in accompanying cash, revenue and cost projections under different scenarios and the corresponding access to finance (at the bank or elsewhere).<\/p>\n

\tThis analysis can be visualized by the auditor. In Figure 1 and 2 I show how the results of her\/his analysis could look like for two companies. In the figures the value of ZERO reflects the situation where the company has to start preparing for a possible discontinuity, while the situation further deteriorates if the outcome dips below ZERO.<\/p>\n

\tI show five scenarios with equal chances to unfold (all circumstances favorable to all circumstance unfavorable). At minus ONE, the company is bankrupt with 100 percent certainty. If the company scores above ZERO, it enters into the safety zone where it can score a maximum of ONE (100 percent certainty to survive on its own). To deal with uncertain outcomes  'top' and 'low' levels give an indication of the interval in which the outcomes can move within each scenario.<\/p>\n

This presentation provides a clear signal to the user of financial statements of where the firm is likely to be heading in the foreseeable future.  For example, we can see that company 1 only stays outside the bankruptcy zone if all opportunities work out favorably. If we look at company 2, we see a much more promising picture in that respect, because the company manages to stay outside the bankruptcy zone in most cases.<\/p>\n

 <\/p>\n

\"\"<\/p>\n

Readers may now be concerned that the auditor is not actually making a statement. However, as suggested in Figure I, company 1 can only survive if all conditions work out favorably, with a chance of 20 percent for that to happen. The auditor’s  opinion gives a clear signal of  the chances of survival but it at the same time does not rule out the possibility of the company’s chance to continue its operations as a going concern.  In the spirit of deserved confidence it would be conducive if auditors were to make a statement of which scenario de facto<\/em> surfaced and discuss this course of affairs in the light of the predicted scenario’s. <\/p>\n

 <\/p>\n

Jan Bouwens is Professor of Accounting at the Amsterdam Business School of the University of Amsterdam, a research fellow at the Judge Business School of the University of Cambridge and Managing Director of the Foundation for Auditing Research, The Netherlands.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

It is more than year ago that Sir Donald Brydon published his famous review where he introduced the notion of deserved confidence. One of the most contentious elements of audited reports pertains to the going-concern opinion of auditors.  Auditors are scorned  if a company goes bankrupt despite the fact that the auditor gave a clean […]<\/p>\n","protected":false},"author":96,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0},"categories":[],"tags":[2],"acf":[],"yoast_head":"\nGoing concern is not a point but a range - ARC<\/title>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Going concern is not a point but a range - ARC\" \/>\n<meta property=\"og:description\" content=\"It is more than year ago that Sir Donald Brydon published his famous review where he introduced the notion of deserved confidence. 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