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Going Concern Staff Paper Due This Summer

The PCAOB’s staff is working on a consultation paper on the audit standard for going concern warnings. The audit regulatory board is looking to change the auditing standard partly in response to the FASB’s 2014 adoption of an accounting standard that assigned management the responsibility for making a disclosure to investors when a company’s survival was doubtful. Now the PCAOB staff is considering how the audit guidance may require some refinement given the new responsibilities for management.

The PCAOB is planning to issue a staff consultation paper in the summer of 2015 to begin work on updating its going concern guidance, Chief Auditor Martin Baumann said during a June 18 meeting of the Standing Advisory Group (SAG) in Washington.

The audit regulatory board is considering making revisions to Statement on Auditing Standards (SAS) No. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern , and related standards to push auditors to put more rigor into the evaluations they perform about a company’s prospects for survival.

In the 2008 financial crisis, several large financial companies collapsed, two of the nation’s Big Three car makers had to be rescued by the federal government, and the pain was felt throughout the economy. The failures happened with little to no advance warning from the companies involved. Since then, regulators have sought to change the accounting and auditing standards and reporting rules to produce a better warning system.

SAS No. 59 is among the standards that places the burden on outside auditors for alerting the markets when a company is about to fail. When the auditor concludes that there is “substantial doubt” about a company’s ability to meet its obligations, the auditor needs to issue a going concern warning.

Until now, companies did not have to make similar disclosures, but in August 2014, the FASB established a requirement for management in Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern .

The standard requires businesses to disclose new information in their financial statement footnotes when there is substantial doubt about their survival. The doubt exists when it’s “probable” that there would be a “severe impact” on the business’s ability to meet its obligations that are coming due in the next 12 months.

PCAOB staff members are considering whether auditors should get an additional explanation for key concepts when they make a going concern evaluation. For example, there’s no set definition for “substantial doubt” in the auditing literature.

Baumann said during the advisory group meeting that the thresholds for management disclosure are different under U.S. GAAP and IFRS. “Our PCAOB standard has to consider both financial frameworks,” he said.

Staff Audit Practice Alert (APA) No. 13, Matters Related to the Auditor’s Consideration of a Company’s Ability to Continue as a Going Concern , issued in September, says among other things that the PCAOB’s standard at this time has not changed, and auditors should continue to follow SAS No. 59 in making a going concern evaluation.

However, FASB member Lawrence Smith was worried that the PCAOB instruction to continue following current standards could create confusion among auditors and their clients.

Smith said the FASB’s ASU No. 2014-15 allows for early adoption and is applicable for fiscal years ending after December 15, 2016.

“There can be confusion and conflict in terms of how the standard is implemented because… we define what substantial doubt means, yet the auditing literature does not define what it means,” Smith said. “So the auditor and the preparer could have differences of opinion as to whether there is substantial doubt about a company’s ability to continue as a going concern.”

In Smith’s view, the PCAOB could easily clear up the confusion by issuing a standard that says an auditor should state whether management disclosures comply with U.S. GAAP or a foreign GAAP.

If the company discloses the substantial doubt about its financial viability, Smith said the auditor should indicate in the report the existence of that doubt.

“If the company does not indicate that there is substantial doubt, and the auditor agrees, then nothing needs to be done,” Smith said. “If they disagree, then they should issue a qualified report. And that’s it. End of story.”

Smith said the PCAOB then can address its plans to revise its going concern guidance and its requirements for auditors in the staff paper. But he urged the audit regulator to be clear.

“Don’t allow there to be a state of confusion for a potentially extended period of time for the auditor and the preparer,” he said.

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