Going Concern

A special type of audit comment that is particularly important to a credit professional relates to the ability of a customer to continue as a "going concern." Under generally accepted accounting principles, both assets and liabilities are recorded and classified on the assumption that the company will continue to operate. Assets, for example, may be presented at amounts that are significantly greater than their liquidation values with this assumption in mind.

From time to time, conditions may arise that cause the company's auditors to question the going-concern assumption. Some examples of problems that could cause the auditor to doubt the company's ability to remain in business include:

• Negative cash flow
  
• Significant net losses
  
• A serious decline in sales and in demand
  
• Defaults on debts owed to secured creditors
  
• Loan covenant violations
  
• Sizeable contingent liabilities
  
• Lengthy strikes or work stoppages
  
• Major product recalls
  
• Tax liens placed on the business
  
• Lawsuits filed against the company - in particular personal injury suits
  

If a substantial doubt exists about the company's ability to continue as a going concern for a period of one year from the balance sheet date, the auditors modify their report by adding a final paragraph indicating that:

• Assets were listed as though the company were a going concern, but
  
• In the event of a bankruptcy and liquidation, many of the company's assets would almost certainly not be worth as much in liquidation as the assets were to a going concern.

Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.