The PCAOB is planning to issue a consultation paper on the audit standard on going concern warnings in the first half of 2016. Investors believe the current guidance is flawed and want earlier warnings when companies are in such deep financial trouble that their survival is in doubt.
The PCAOB is planning to issue a staff consultation paper in the first half of 2016 to solicit comments on potential ways to revise the standard on an auditor’s going concern evaluations, according to an updated standard-setting agenda the board posted on January 5.
The staff has encountered some delays in writing the paper. The PCAOB had previously planned an early 2015 release, but the staff has been doing more research and outreach on the complicated issue. The board also has been working on several other projects.
The staff paper is a key step in the PCAOB’s project to refine the existing standards, which spell out an auditor’s duties in assessing a company’s prospects for staying in business. The requirements are set out in AU Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern,” (AU-C Section 570), and Section 10A of the Securities Exchange Act of 1934.
Auditors must make an evaluation as to whether there is “substantial doubt” about a company’s ability to continue as a going concern, and if there is, the auditor needs to report it in the auditor’s opinion.
During the AICPA’s Conference on SEC and PCAOB Developments in December 2015, PCAOB Chief Auditor Martin Baumann said, historically, the going concern evaluation has been solely an auditor’s responsibility, but the FASB added a requirement for management, effective for 2016 year-end reports.
In August 2014, the FASB issued 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, which spells out management’s role in disclosing “substantial doubt” about a company’s ability to remain in business.
The FASB defines substantial doubt using a threshold of whether it is “probable” that a company will not be able to pay debts as they are due in the 12 months after financial statements are issued. In auditing standards, substantial doubt is based on more qualitative factors.
The PCAOB in September 2014 issued 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 , which said, among other things, that the board’s guidance has not been altered by the FASB’s ASU No. 2014-15, and auditors should continue to follow existing auditing standards in making a going concern evaluation.
“We recognize the importance of coming to a resolution in the near term,” Baumann said at the conference. “The staff have been engaged in significant outreach and research, including first, the legislative history of this disclosure, which intended this evaluation to be an early warning of financial difficulties by companies.”
Investors want the standards improved because many large companies, including banks, during the financial crisis would have gone into bankruptcy without government bailouts within a year of getting clean audit opinions.
Baumann said the staff has been studying how effective the existing going concern reporting has been. “Is it getting investors the information needed on a timely basis?”
He said the staff also has been looking for ways to update the standards taking into account of the differences between auditing and accounting standards. The PCAOB also has to tackle differences in management’s assessment under U.S. GAAP and IFRS.
The IASB requires management to report when there are material uncertainties that may cast significant doubt on the company’s ability to continue as a going concern under IAS No. 1, Presentation of Financial Statements.