Under the Pandemic, How the Going Concern Topic Reshapes Audit Dialogue

Editor's note:This article is a contributed piece by Bob Dohrer (CPA), Chief Auditor of the American Institute of Certified Public Accountants (AICPA). The views expressed are solely those of the author.

As the widespread impact of COVID-19 continues to dominate headlines, a new topic that may surface in the news for private and public companies is gradually emerging: going concern.

Going concern is the concept that financial statement users—including investors, employees, customers, lenders, and others—can expect a company to continue operating for a reasonable period (usually the next year) given the events and conditions that existed as of the issuance of the financial statements. The term may sound unsettling, but it is an accounting concept used to understand a business's viability.

Even in a strong economy, companies can lose key contracts, face cash flow problems, or be at risk of not repaying loans. They can often address these challenges by making critical business decisions, such as negotiating debt obligations with lenders or postponing certain projects. If a company can resolve such challenges and continue operating for a year or more, it is still considered a going concern.

The term also has another meaning. When there is substantial doubt about a company's ability to continue as a going concern, the auditor will add an emphasis-of-matter paragraph to the audit report on the financial statements to draw users' attention to the issue. This is sometimes referred to as a "going concern opinion."

Financial statement users may wonder: Does a going concern modification indicate a prediction of future failure? While predicting the future is not easy, it can be reassuring that a going concern modification involves numerous variables, including the company's industry, sector, financial health, liquidity sources, and availability of funding.

Beyond the usual issues: New conversations during the pandemic

During the COVID-19 pandemic, an important aspect of ongoing communication between companies and auditors is their resilience during times of stress. The current economic environment, combined with our new ways of working, will prompt auditors to delve deeper into how companies sustain operations. They will ask more questions and seek information that may not have been needed in the past.

For example, auditors may need more detailed cash flow forecast information, including probability-weighted scenarios during uncertain and unpredictable times, as well as balance sheet debt positions. This does not necessarily mean a going concern modification will be issued.

Companies should be prepared to provide auditors with multiple future scenarios and models (if requested). While this may mean more work, and possibly some difficult conversations, auditors are committed to providing clear and accurate information to financial statement users.

Another significant change brought by COVID-19 is that going concern opinions are being viewed as critical information. In many ways, auditors add credibility to information that reflects a company's operations and financial health.

The ability of auditors to communicate with boards of directors, audit committees, and other key stakeholders helps ensure that transparent information is available, bringing calm amid significant change, even if that includes a going concern opinion.

As the Chief Auditor of the AICPA, I frequently communicate with auditors of private companies, not-for-profits, and governments about COVID-19-related issues and the possibility that clients may not be able to continue as going concerns. In a recent article I co-authored in the Journal of Accountancy, I provided the following advice for auditors and those charged with governance:

• Evaluate whether COVID-19 raises doubt about the company's ability to continue as a going concern.
• Review management's assessment and determine whether it is complete and accurate.
• If management has substantial doubt about the company's ability to continue as a going concern, disclose it in the notes to the financial statements, regardless of whether the doubt is alleviated by any recovery plans.
• Evaluate management's plans to address substantial doubt and assess the potential impact on the audit report.
• Do management's plans alleviate substantial doubt? If so, an unmodified opinion can be issued.
• If the going concern basis of accounting is appropriate but substantial doubt remains, an emphasis-of-matter paragraph is required in the audit report.
• If the going concern basis of accounting is not appropriate, an adverse opinion should be issued.

We cannot predict—despite our best efforts—the economic conditions at the end of 2020. Auditors, boards, and management are finding new ways to work collaboratively and independently, embracing new technologies. As we move through the peak of the pandemic, it is essential that everyone continues to focus on the needs of financial statement users, who need transparency more than ever.

Note: The AICPA'sAuditing and Attestation Standardsapply to organizations that are not required to undergo audits by the Public Company Accounting Oversight Board (PCAOB) and address the above issues from multiple perspectives, including audit evidence, management estimates, and materiality. Additionally, the AICPA provides COVID-19 audit and accounting resourceswebpage, for those who wish to learn more about related topics and key risks in the 2020 year-end audits.