Auditor's Opinion
Implications of whether the company is or
would be a "going concern."
By Steven Kozack
One reader asked: We recently received audited financial statements
from a customer and the auditor's opinion letter contained comments
questioning whether the company is or would be a "going concern." What
are the implications of this statement?
Answer. This is a warning to trade creditors and others that receive
the financial statements in question that the company in question
may fail! Under generally accepted accounting principles, the values
of assets as recorded on the balance sheet are based on the assumption
that the company will continue to operate. Specifically, assets are
not listed at their liquidation value. Conditions may arise that
cause the company's auditors to question whether or not the company
can remain in business, and if this is the case the auditors modify
their auditor's opinion letter to indicate that:
Assets were listed as though the company were a going concern, but
In the event of a bankruptcy and/or liquidation, the company's assets would
probably be worth much less than the amounts listed on the balance sheet.
Some examples of problems that could cause the auditors to doubt
the company's ability to remain in business include:
Significant losses
Defaults on debts owed to secured creditors
Loan covenant violations
Sizeable contingent liabilities
Tax liens placed on the business |