Light At The End Of A Very Dark Tunnel?

Auditor: “Um, I highly doubt you’ll be able to continue operations for the next year”

CEO: “Ah come on, we’re laying off some people, moving to cheaper rent, it’s going to all work itself out!”

Stock Market: “I think I’m going to go with the auditor on this one…”

Receiving an auditor’s report expressing doubt for going concern is something every company dreads (although it shouldn’t come as a surprise); however, it appears that despite evaluations alluding to upcoming failure, companies still seem to look on the bright side and point out the opportunity which still lies ahead. Similar to the PanAm case we recently looked at, Trinsic, an IP telephony firm, agree to the fact that their business is in trouble, but also discuss new steps they have taken to revive their business and move forward. Unfortunately, these improvements are just projections (using words such as “expect” or “anticipate”) and at least for the time being cannot be taken too seriously.

I find it interesting that companies go to such lengths to try and salvage investors since realistically, once someone sees that that their firm may not be able to sustain itself over the next 365 days, I doubt they will keep their money and trust with them (or most likely withdraw their stock and perhaps wait to see how these forecasts pan out).  Although an incorrect going concern evaluation of a company can lead to severe complications, I definitely support the principle, for I would imagine that auditors would prefer not to express a doubt for going concern unless there was a very good reason for it (they’d also be losing a client) and I’d therefore take such a statement quite seriously and ignore the company’s words of encouragement.

So as an investor in Trinsic, while I appreciate the uplifting words, I’m going to say no thanks!