The Going Concern Gap in U.S. GAAP

Filling a Hole in Existing Standards

Jennifer Edmonds, PhD, and Ryan Leece, PhD, CPA, and James Penner, PhD, CPA

Recent events, such as the fiscal crisis of 2007–2008 and the economic recession that followed, have prompted concerns about whether investors have received sufficient notice of impending corporate bankruptcy. According to data available from New Generation Research, from 2009 to 2013, 561 public companies filed for bankruptcy, and investors had little, if any, warning in some cases (see http://www.bankruptcyrates.com). As a result, the auditing profession has been called out by some for failing to warn financial statement users of the potential for bankruptcy. Anne Simpson, senior portfolio manager and investment director, global governance at the California Public Employees’ Retirement System (CalPERS), called out the failures of the current system at a roundtable meeting of the IASB. She stated, “A going concern warning from an auditor is rarer than a hen's teeth. You have to be dangling off a cliff, hanging on by your fingernails before the auditor blows the whistle.” Simpson added that “what should be an extremely useful form of audit communication to capital providers, it seems to us is not being used (Emily Chasan, “Going Concern Opinions on Life Support with Investors,” CFO Journal, Sept. 12, 2012).