In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15 Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure Uncertainties about an Entity's Ability to Continue as a Going Concern. On February 22, 2017, the AICPA’s Auditing Standards Board issued Statement on Auditing Standards (SAS) 132, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. In November, I informed a policyholder of this soon-to-be-released article and was asked, "Why? People should have already read those standards." My answer: “Because many haven’t read the standards, and the professional standards don’t address the ‘jury standards’ or risk management."
These landmark standards alter the financial statement landscape. The standards provide the minimum requirements that accountants and their clients' management must follow when there is doubt about the entity's ability to continue as a going concern. Regrettably, the FASB only addresses U.S. GAAP and the ASU-only audits. Accountants must understand these standards but must also adhere to the "jury standards" implicit in the standards. This article covers the standards’ risk management requirements, which expand the scope of the standards to other financial reporting frameworks and financial statement services (reviews, compilations and preparations of financial statements).
Several years ago, I attended a presentation at which a former member and a current member of FASB spoke. My suggestion that the FASB should set standards mandating that an entity's management evaluate whether substantial doubt exists regarding the entity’s ability to continue as a going concern was rebuffed at the presentation. The FASB has since come around.
Many accountants have been critical of standard-setting bodies for inertia, inaction or actions counter to their interests. We at CAMICO applaud the FASB's change of mind (issuance of ASU 2014-15) and its decision to set standards mandating that an entity’s management consider whether the entity has the ability to continue as a going concern, and the steps management must then take to assess the adequacy of the response to that doubt. We were heartened by the FASB codification of the going concern concept into U.S. GAAP and welcome the steps taken by the Auditing Standards Board (SAS 132).
Unfortunately, there remains a gap in the guidance and knowledge regarding the standards’ implications for CPAs, and minimal understanding or consensus regarding the best practices for implementing the new auditing standard. There’s also a void regarding the implications for review, compilation and preparation of financial statement engagements. The AICPA’s Accounting and Review Services Committee (ARSC) issued an exposure draft of a proposed Statement on Standards for Accounting and Review Services (SSARS), Omnibus Statement on Standards for Accounting and Review Services – 2018 for public comment on September 14. The exposure draft is available at https://www.aicpa.org/content/dam/aicpa/research/exposuredrafts/compilationreview/20170914a-ed-omnibus-ssars-2018.pdf, with comments requested by December 14, 2017. The exposure draft provides guidance for review engagements, but is silent regarding compilation (AR-C 80) and preparation (AR-C 70) engagements. The ARSC also recently released an updated version of its Guide, the AICPA’s Preparation, Compilation, and Review Engagements Guide. It too does not adequately address the accountant’s response when there is doubt about their client’s ability to continue as a going concern.
This article is intended to either alert you or refresh your memory regarding U.S. GAAP guidance, GAAS guidance, and extant and proposed SSARS pronouncements. It also offers some recommendations CAMICO considers best practices for CPAs in public practice when performing financial statement reporting or preparation services and considering their client’s ability to continue as a going concern.
Many are unaware that the AICPA’s standard-setting bodies (i.e., the ASB and ARSC) consciously choose not to offer or address risk management when setting standards. This article will refer to AICPA pronouncements and guidance, and supplement them with risk management guidance not found within the standards.
Because of the extensive changes to the going concern landscape, we begin with an explanation of what has changed.
Prior to ASU 2014-15, the FASB had not provided accounting standards regarding going concern. The FASB had abdicated this responsibility and had allowed U.S. auditing standards and federal securities law to establish requirements that auditors evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a "reasonable period of time" not to exceed one year from the balance sheet date. Historically, the going concern presumption (that an entity would continue as a going concern) is the basis for preparing financial statements unless or until its liquidation is imminent. CPAs had been forced to look exclusively to the auditing standards to identify how going concern issues were to be handled. The SSARSs eventually added guidance regarding how CPAs performing compilations and reviews should address doubts about their clients’ ability to continue as a going concern, but the SSARSs offers no advice for accountants performing AR-C 70 preparation of financial statement engagements. The guidance regarding the going concern issue within the clarified SSARSs (AR-C 70 and AR-C 80) is considerably less than what was present prior to the SSARSs clarification effective for unaudited financial statements for periods ending after December 14, 2015. What guidance existed didn’t vanish. Instead, it was relocated and can now be found in the AICPA’s Preparation, Compilation, and Review Engagements Guide. The Guide is one of the many AICPA interpretive publications that accountants are expected to consider. The Guide houses a wealth of information for accountants performing SSARSs engagements. Sadly, many accountants are unaware of the requirement to read the Guide nor of the wealth of information the Guide contains.
The Guide prohibits "accountants from preparing financial statements that omit substantially all disclosures required by the applicable financial reporting framework if the accountant becomes aware that the omission of substantially all disclosures was undertaken with the intention of misleading users of such financial statements. For example, management may direct that financial statements be prepared that omit substantially all disclosures because management does not want a user of the financial statements to be aware of negative information, such as a going concern … If the accountant is aware of management's intention to mislead users of the financial statements, the accountant is precluded from preparing the financial statements.” (Emphasis added) 1
Awareness of intent is difficult (if not impossible) to identify. Also, CAMICO doesn’t believe that intent should be the lone driver. CAMICO encourages CPAs to expand the guidance to include and address any instances in which the CPA believes that readers may intentionally or unintentionally be misled. Intent is problematic but should not be decisive in the reporting, presentation or disclosure of any entity’s financial results. If the financial statements would likely mislead a user regarding the entity’s ability to continue as a going concern, make the reporting, presentation or disclosures you deem appropriate to minimize the likelihood that a user could be misled or harmed by relying on the financial statements.
The Guide points out that AR-C section 80 does not preclude accountants from including an emphasis-of-matter or an other-matter paragraph in their compilation reports. CAMICO encourages CPAs to use emphasis-of-matter paragraphs to highlight matters already disclosed in the financial statements or accompanying footnotes. Many readers of financial statement reports focus on whether the statements are unmodified (in audits these used to be called "clean opinions") and assume the financial statements don’t include matters of concern when unmodified. Emphasis-of-matter paragraphs are not permitted when the matter being emphasized isn’t disclosed elsewhere in the financial statements. Emphasis-of-matter paragraphs are an ideal method to highlight and draw attention to going concern issues.
However, AR-C 70 and AR-C 80 permit accountants to prepare or compile financial statements that omit substantially all disclosures when client management so elects. The standards don’t refer to "no disclosure" financial statements. Instead, they refer to financial statements with "substantially all disclosures omitted".2 CPAs have commonly shortened the phrase to "no disclosure" financial statements because they rarely (if ever) choose to add disclosures when management has made this election. Many CPAs are often reluctant to add disclosures in such instances, fearing that doing so would expose them to additional risk were a user of the financial statements to later suggest that, had certain other disclosures been present, they would have acted differently and not have suffered a loss.
CAMICO's more than 30 years of experience in defending CPAs does not support this position. Our claims files don’t include a loss sustained because of a user of the financial statements alleging that the CPA was negligent in not including other disclosures when they have disclosed doubt about an entity’s ability to continue as a going concern (when management elected to omit substantially all disclosures). The reciprocal argument is certainly not valid. CPAs have been sued, and some have lost, when they neglected to modify their report, or the underlying financial statements did not disclose the economic challenges faced by the client. So, add an appropriate disclosure and an emphasis of matter (if a compilation) if you perceive that substantial doubt may exist regarding the ability of an entity to continue as a going concern for a year from the date the financial statements are issued (or available to be issued).
The multiple responsibilities of AICPA membership are significant stressors for CPAs in public practice. Most states have incorporated much of the AICPA’s Professional Code in their own standards, so not being an AICPA member doesn’t exempt the accountant from the requirements of membership. The preamble to the profession’s code of conduct points out that "[m]embership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a member assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. … These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage." (emphasis added) 3
The going concern dilemma puts our responsibilities to the public and to our clients at odds, as there may be pressure felt or imposed by the client to ignore or discount our conflicting responsibilities to the public, and accountants may be reluctant to appropriately address doubts about an entity’s ability to continue as a going concern, not giving enough weight to the profession’s commitment to honorable behavior, even if doing so is a personal sacrifice (the accountant may lose the client). Similarly, clients’ interest in attracting potential lenders and investors can be at odds with the public’s interest in perceiving doubt about an entity’s ability to continue as a going concern.
The preface to the auditing standards mandates auditors maintain professional skepticism and exercise professional judgment throughout the planning and performance of audits. There is no mention of professional skepticism within the SSARSs, only brief mention in the Guide (and only for review engagements).4 The "jury standards" contemplate accountants being skeptical in all services they perform. It is understood that the accountant may not appreciate or be exposed to evidence that would trigger professional skepticism, but the argument that "it is only a [review, compilation or preparation] of financial statements engagement" is not valid. An accountant is not permitted to stick his/her head in the sand and ignore going concern or other issues.
FASB ASU 2014-15 – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going ConcernThe ASU established responsibilities for management to address going concern, defined substantial doubt, set one year from the date that the interim or annual financial statements are issued as the going concern assessment period, and established financial statement disclosure requirements. In many (most) instances (not public companies) management continues to presume that the going concern assessment, disclosure, and conclusion functions are their CPA's responsibility. CPAs need to be careful not to assume this responsibility and instead fulfill the requirements of the audit, review, compilation or preparation service they’ve been engaged to perform. On audits, this means auditors are to (1) obtain sufficient appropriate audit evidence to conclude on the appropriateness of management’s use of the going concern basis of accounting, (2) conclude whether substantial doubt exists about the entity's ability to continue as a going concern for a "reasonable period of time," (3) evaluate the adequacy of the disclosures regarding the entity's ability to continue as a going concern," and (4) appropriately report on the financial statements.
Other Financial Reporting FrameworksAccountants need to understand U.S. GAAP and the differences between U.S. GAAP and the financial reporting framework chosen by their client. If their client’s non-GAAP financial reporting framework does not have published standards (e.g., modified cash or income-tax bases) accountants should adopt the U.S. GAAP methodology to address issues not understood to be an accepted framework departure, or should disclose the impact of the GAAP departures. Since income tax basis and modified cash basis of accounting don’t prescribe the appropriate response to going concern, some clients and uninformed accountants think that , the report, financial statements and accompanying disclosures need not address the doubt. This is wrong.
Compilation and Preparation of Financial Statement EngagementsNo assurance is obtained or provided on compilation or preparation of financial statement engagements. Whether or not the client’s management has addressed the going concern presumption, the accountant may not ignore the issue when the accountant perceives doubt about their client’s ability to continue as a going concern. As with review and audit engagements for which assurance is obtained, accountants should require that their client’s management consider the going concern presumption, and if the client’s management perceives doubt about the entity’s ability to continue as a going concern, require that management provide the accountant with the actions management intends to take to address the doubt. Again, regardless of the level of service, the auditor/accountant then must assess the doubt and the viability of the perceived solutions. Audits and reviews contemplate obtaining audit evidence and review evidence, respectively. Compilation and preparation engagements don't require accountants to verify the accuracy or completeness of the information their clients provide, or to otherwise gather evidence to express an opinion or conclusion. However, when faced with a going concern issue, accountants, regardless of service, must assess the going concern presumption and the viability of the solutions offered by client management. This could include obtaining confirmations, written representations and valuations to assess the viability of management’s response to the going concern issue.
The compilation and preparation of financial statements services permit clients to omit substantially all disclosures. When there is doubt about an entity's ability to continue as a going concern, the accountant should take steps to bring the doubt to the attention of financial statement users. As with audits and reviews, the accountant performing a compilation or preparation service should be certain that the doubt, and management's anticipated response to the doubt, are appropriately disclosed in notes accompanying the financial statements. When performing a compilation, the accountant should add an emphasis-of-matter paragraph to their report, drawing attention to the disclosure(s). However, no accountant's report should accompany an AR-C 70 preparation of financial statement engagement. So, instead of an emphasis-of-matter paragraph, CAMICO recommends the accountant alter the title to each financial statement to include the descriptor "Substantially All Disclosures Required by [Applicable Financial Reporting Framework (e.g., GAAP)] Omitted – See Going Concern Disclosure." The accompanying disclosures for compilation and preparation engagements should be labeled "Selected Information—Substantially All Disclosures Required by [Applicable Financial Reporting Framework] Are Not Included."
ConclusionAccountants should advise their staff to be on the lookout for going concern issues regardless of the service performed. See the article, "Address Going Concern Issues as Early as Possible." When a going concern issue is perceived, accountants should take immediate action to communicate the concern to the client. This article offers a limited understanding of ASU 2014-15, SAS 132, the SSARSs, and the Guide, and is no substitute for reading and understanding the pronouncements. If you haven’t already done so, CAMICO strongly encourages you to read the pronouncements, conservatively implement each, and embrace the risk management tips offered by this article. Policyholders can call CAMICO’s Accounting and Auditing Hotline should you wish to discuss the article or how best to respond to a client’s going concern dilemma.
Duncan B. Will, CPA/ABV/CFF, CFE, is Loss Prevention Manager/Accounting & Auditing Specialist for CAMICO www.camico.com . He leverages his more than 30 years of experience in accounting, including public accounting, forensic accounting, consulting, and audit and tax compliance, when working closely with the Loss Prevention Specialists to manage the department’s efforts to deliver to policyholders the high-touch, high-quality CAMICO experience. Will’s specialty is accounting and auditing–related risk management services. He advises policyholders through the CAMICO Loss Prevention Hotline and speaks to CPA groups on a wide range of topics.
1 AICPA Preparation, Compilation and Review Engagements Guide, ¶3.41.
2 AR-C 70, ¶.20-.21; AR-C 70, .A18-.A19; AR-C 80, ¶.24-.28; AR-C 80, .A36-.A37; AICPA Preparation, Compilation and Review Engagements Guide, ¶3.39-3.41.
3 ET Section 0.300.010 ¶.01-.02
4 Preparation, Compilation and Review Guide ¶1.12 – 1.15