In this heated political environment combined with one of the largest recessions in a century, it is no surprise to find that governments are slashing budgets and will no doubt continue to cut programs across the country. Recently we were on an audit of an entity that relied heavily on government funding for its programs, and noted that the primary funding for this entity had come up in discussions by our State leaders during the budget process as a place that could be cut. This entity had survived that round of budget cuts, but the question remains for how long?
That question is on the minds of many not for profits and quasi-governmental entities across the country going into another heated political year. But what does that mean to those entities auditors and their financial statements? The reality is that these entities may be facing a time in which their ability to continue as a going concern will be questioned by their auditors. Currently auditors across our country are referring to Statements on Accounting Standards (SAS) No. 59 for guidance on how to deal with going concerns. However, the Auditing Standards Board (ASB) has recently issued a proposal to redraft this SAS to better help auditors in this environment.
We all know that simply having a disclosure regarding the entities ability to continue as a going concern can in itself put that entity on a track towards ceasing to exist simply due to the nature of the risk surrounding that disclosure. This puts tremendous pressure on the entity and the auditor, as well as their relationship together. In this redrafting proposal by the ASB there are two important changes to the SAS currently being followed. The first is the auditor’s requirement to begin obtaining written representation from management when such conditions could arise that would give way to a going concern disclosure. This requirement would take a large portion of the pressure off of the auditor and place it on the entities management to take such a disclosure very seriously. The second is the audit documentation of certain procedures performed that would be required to reassess the entity’s going-concern status if a report is reissued without the disclosure. Among the procedures is the auditor’s responsibility to consider the effects of such a disclosure on the financial statements. This may help reduce the “self-fulfilling” effect the disclosure has in the first place.
In any matter it is important for management to continue to plan for the future to determine ways to mitigate any possible going concern disclosures. This includes those who are receiving government assistance to search for alternative revenue sources without jeopardizing their status of being a not for profit or quasi-governmental entity.
Brain Hemmerle, CPA