In the year 2001 and 2002, many of publicly traded companies in the United States filed for bankruptcy. It was not so unexpected because of the national recession, but the auditors’ failure to warn the investing public of the financial distress and impending failure of their clients through modification of the audit report in accordance with SAS 59 was surprising. SAS 59 requires an auditor to evaluate conditions or events discovered during the engagement that raise questions about the validity of the going-concern assumption. An auditor should consider whether certain conditions or events discovered during the course of the audit contradict the going-concern assumption.
Then why some auditors fail to issue a going-concern opinion? First of all, auditors fear that a going-concern opinion can hasten the demise of an already troubled company. It can reduce a loan officer’s willingness to grant a line of credit to a troubled company. Second, auditors have little independence. Since the management determines the auditor’s tenure and remuneration, auditors have to listen to the management. Third, and most critical, reason may be the fundamental misunderstanding of the assumption itself. Because the assumption is not cleary defined anywhere in the official pronouncements, there are wide-ranging interpretations.
I believe that some changes to the process of the going-concern assumption are needed. It seems like that SAS 59 is not very effective and useful. Then why not modify it? The accounting standards bodies should make the standard clear so that there be no misunderstanding, and the auditors should have the right and power to give their actual opinions to the public. In that way, the information will be more effective and useful, and therefore, satisfying public expectations.
