Accounting and auditing standards for going concern achieved greater harmony Wednesday when the AICPA Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.
SAS No. 132 supersedes SAS No. 126 of the same title and will be effective for:
- Audits of financial statements for periods ending on or after Dec. 15, 2017; and
- Reviews of interim financial information for interim periods beginning after fiscal years ending on or after Dec. 15, 2017.
The primary objective in the development of SAS No. 132 was to consider the accounting provisions of the FASB accounting standard that was issued in 2014 and the GASB accounting standard for state and local governments.
Issue at the forefront
An entity’s ability to continue as a going concern is a fundamental principle in the preparation of financial statements. Whether the organization is public, private, not-for-profit, or governmental, stakeholders want to know that the organization will be around in the near term. The issue of going concern is not new. It has been embedded in auditing literature (in the United States and internationally) for years. However, the issue came to the forefront in the aftermath of the global financial crisis in the last decade. Many companies declared bankruptcy and went out of business rapidly, often in the midst of the reporting cycle. Stakeholders were left wondering, “What happened? Why was I not alerted that the company was in financial stress? Where were the auditors?”
In response to those questions, investors, regulators, and other stakeholders called for greater transparency in the financial statements and their accompanying disclosures. Calls for transparency also went out to the auditors who are responsible for rendering an opinion on those financial statements.
With that as a backdrop, auditing standard setters around the world undertook projects to revise the auditor reporting standards. For example, the International Auditing and Assurance Standards Board (IAASB) began a project to overhaul its auditor’s report standards. The IAASB’s project culminated in the issuance of the revised suite of auditor’s report standards in January 2015. Among the key changes were revisions to the IAASB’s International Standard on Auditing (ISA), Going Concern (ISA 570 Revised).
In the United States, the AICPA’s generally accepted auditing standards addressed going concern in SAS No. 126. At the time SAS No. 126 was issued, FASB standards did not address management’s responsibilities for evaluation of substantial doubt about an entity’s ability to continue as a going concern. However, FASB was contemplating the development of an accounting standard addressing going concern evaluation. As a result, SAS No. 126 clarified SAS No. 59 of the same title but did not converge with the IAASB’s auditing standard on going concern.
In August 2014, FASB issued its accounting standard that addresses management’s responsibilities with respect to going concern (Accounting Standards Update (ASU) No. 2014-15). Ostensibly, this new accounting standard “makes management go first” and is aligned with the principle that management is responsible for the preparation of the financial statements. ASU No. 2014-15 is effective for annual periods ending after Dec. 15, 2016, and for interim periods thereafter.
Additionally, GASB Statement No. 56 establishes requirements related to management’s responsibilities for assessing going concern for state and local governmental entities.
In January 2015, the IAASB issued its revised auditor reporting standards, which, among other things, included revisions to its going concern standard (ISA 570). A key change in the revised ISA 570 was expanded descriptions of management’s and auditors’ responsibilities regarding going concern in the auditor’s report. The IAASB’s auditor reporting standards, including ISA 570, are effective for audits of financial statements for periods ending on or after Dec. 15, 2016.
In July 2016, the ASB released an exposure draft, Proposed Statement on Auditing Standards, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, to supersede SAS No. 126. It is the ASB’s strategy to converge its standards with those of the IAASB. Accordingly, in developing SAS No. 132, the ASB used ISA 570 as the base. Overall, respondents to the exposure draft supported the ASB’s proposal to update SAS No. 126 in light of the impending effective date of FASB ASU No. 2014-15.
SAS No. 132 does not reflect any revisions related to the convergence with the IAASB’s other auditor reporting standards. Those revisions will be contemplated as part of the ASB’s overall auditor’s report project, which is ongoing.
SAS No. 132 was written to be neutral regarding accounting frameworks so that it can be applied to audits of financial statements prepared under different financial accounting frameworks. However, in discussing certain concepts, reference to certain accounting terms is necessary. To better explain and illustrate those concepts, the ASB used terminology that is more commonly used in the United States, such as terminology from the FASB standards and GASB statements (e.g., substantial doubt).
What is changing?
The ASB retained several concepts from SAS No. 126, including a requirement for the auditor to separately conclude whether there is substantial doubt about an entity’s ability to continue as a going concern, among other matters. The ASB believes the following are the most significant changes to the existing auditing standards resulting from the issuance of SAS No. 132.
Auditor’s objectives and related conclusions: SAS No. 132 clarifies that the auditor’s objectives include separate determinations and conclusions with respect to:
- The appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements; and
- Whether substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time exists, based on the audit evidence obtained.
Financial support by third parties or the entity’s owner-manager: SAS No. 132 includes a new requirement with respect to financial support by third parties or the entities’ owner-manager. When management’s plans include financial support by third parties or the entity’s owner-manager, the auditor is required to obtain sufficient appropriate audit evidence about the intent and ability of such parties to provide the necessary financial support if that evidence is necessary to support management’s assertion about the entity’s ability to continue as a going concern for a reasonable period of time.
The application material of SAS No. 132 explains that the intent to provide the necessary financial support may be evidenced by either:
- Obtaining from management written evidence about the third-party commitment; or
- Confirming directly with the supporting party.
The application material further explains that when the financial support is provided by an owner-manager, the evidence regarding intent may be in the form of a support letter or a written representation. Finally, the application material provides illustrative wording of a third-party support letter.
Period beyond management’s assessment: SAS No. 132 includes a requirement that the auditor ask management about conditions or events beyond the period of management’s evaluation that may have an effect on the entity’s ability to continue as a going concern. The inquiries are not intended to require management to extend its evaluation period but may affect other disclosure requirements or consideration of whether the financial statements are fairly presented.
Use of emphasis paragraphs when substantial doubt is alleviated: SAS No. 132 includes application material to explain situations when an auditor decides to include an emphasis paragraph to highlight the liquidity issues related to management disclosures when the auditor concludes that substantial doubt has been alleviated by management’s plans (this is sometimes referred to as “close-call” situations). An example of the emphasis paragraph in those circumstances is provided as application material.
Interim financial information: In issuing SAS No. 132, the ASB also amends its interim financial information standard, AU-C Section 930, Interim Financial Information. Under the existing standard, the auditor is required to perform inquiries and consider the adequacy of disclosures to address the issue of substantial doubt about the entity’s ability to continue as a going concern if:
- Conditions or events that may indicate substantial doubt about an entity’s ability to continue as a going concern existed at the date of the prior-period financial statements, regardless of whether the substantial doubt was alleviated by the auditor’s consideration of management’s plans; or
- In the course of performing review procedures on the current-period interim financial information, the auditor becomes aware of conditions or events that might indicate the entity’s inability to continue as a going concern. From the review report perspective, the standard provides the auditor an option to include an emphasis-of-matter paragraph when management’s disclosures are adequate.
The ASB decided to require performing review procedures to address the situations when the applicable financial reporting framework includes requirements for management to evaluate the entity’s ability to continue as a going concern for a reasonable period of time in preparing interim financial information. The amendments to the standard reflect a new requirement for the auditor to include an emphasis-of-matter paragraph in the review report when certain conditions or events exist related to substantial doubt about an entity’s ability to continue as a going concern. This decision was based on the ASB’s desire to achieve consistency in auditor reporting in both the annual audit and interim financial information.
Financial statements prepared in accordance with a special-purpose framework: In the scope section, SAS No. 132 makes it clearer that the issues of going concern basis of accounting and whether substantial doubt exists are separate. As a result, when the going concern basis of accounting is not relevant, the auditor is not required to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting. However, irrespective of whether the going concern basis of accounting is relevant in the preparation of special-purpose financial statements, the auditor is required to conclude, based on the audit evidence obtained, whether substantial doubt exists and to evaluate the possible financial statement effects.
—Hiram Hasty, CPA, CGMA, is an AICPA senior technical manager.