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Staff Audit Practice Alert No. 13, Matters Related to the Auditor's Consideration of a Company's Ability to Continue as a Going Concern, (SAPA 13) was released by the Public Company Accounting Oversight Board (PCAOB) Monday. The PCAOB's alert follows less than a month after Financial Accounting Standards Board (FASB) issued its final standard on Presentation of Financial Statements - Going Concern (Subtopic 205-40) Disclosure of an Entity's Ability to Continue as a Going Concern (ASU 2014-15) .
The FASB release brought determination of going concern directly into U.S. GAAP, while also shifting responsibility for making the going concern call from auditors to management.
In my view this 'shifting' of responsibility as a result of FASB's final standard may, in some ways, be largely a "public view" for some companies.
One would think when it comes to going concern and its ramifications it would been seen in a common light by both management and the auditor. However, it is possible in contentious situations where the auditor and management hold different views on going concern that the dynamics now shift from the auditor having initial and final responsibility for making this call over to management. The auditor will have their usual responsibilities with respect to conclusions reached by management -- whether they agree or disagree -- and whether they have seen evidence that is materially in conflict with the conclusions expressed by management.
Another key change concerning going concern was what some view as upping the threshhold of what constitutes "substantial doubt" by incorporating FASB's notion of "probable." Those who view "probable" as a higher threshhold than "substantial doubt" when applied to going concern may view FASB's ASU 2014-15 as posing a higher hurdle or requiring a company to have a worsened set of economic prospects.
Did "Early Application" Permitted by FASB Prompt PCAOB to Issue its Alert?
FASB's new standard becomes effective, "with annual periods ending after Dec. 15, 2016," FASB's press release and ASU 2014-15 also noted that "earlier application [is] permitted."
But before you go to FASB's new going concern standard, stop and read PCAOB's alert issued today.
This makes it crystal clear that current substantial doubt threshhold, not probable threshhold, is the standard by which auditors are required to abide when it comes to going concern. That is at least unless, and until, the PCAOB decides otherwise as part of its due process in formally considering what type of standard-setting action to take in light of the FASB action. The PCAOB, the U.S. Securities and Exchange Commission and FASB had consulted with each other at various points during the life of the going concern project.
In my view, it is possible the fact that early application is permitted on FASB's new standard may have prompted the PCAOB to issue its alert to clear up any ambiguity until the PCAOB addresses how to update auditing standards on going concern. This matter is on the PCAOB board's standard-setting agenda, as noted in the PCAOB's press release.
Beyond that, as to the PCAOB's release being issued at this particular point in time, PCAOB Deputy Chief Auditor Keith Wilson shared with FEI Daily,
"We wanted to issue the alert on the heels of FASB's update to its going concern accounting standard in case auditors had questions about how the new FASB standard affects their audits."
We asked Wilson to comment on the probability standard/likelihood threshhold issue, as to the "probable" definition in FASB's standard, vis-a-vis the term "substantial doubt" in auditing standards. Wilson replied,
"The alert makes clear that we expect auditors to apply AU Sec. 341 when evaluating whether their audit reports need a Going Concern paragraph."
On the question of how FASB's action may lead in turn to PCAOB decisions in the auditing standard-setters follow-on project, Wilson concluded,
"Our standard-setting project on going concern will take into account the new accounting standard, but it is premature to comment on what potential changes to the auditing standard might be."
Herz & Tweedie to Meet Again at Oct. 2 PCAOB SAG Meeting
Former FASB Chairman Robert (Bob) Herz and Former IASB Chairman Sir David Tweedie, who spent years across from and next to one another as chairs of their respective accounting standards boards, will meet again at the Oct. 2, 2014 PCAOB Standing Advisory Group Meeting, although they are slated to speak on different panels that day, according to the agenda and list of speakers for the Oct. 2 PCAOB SAG meeting recently posted. Panels of experts will speak to the PCAOB (the meeting will be publicly webcast) on the following topics:
- Global inspection findings, investor perspectives, academic research, developments in valuation; financial reporting frameworks affecting accounting estimates. (My two cents: Does this mean the "mixed attribute model" vs. fair valuing everything?), auditing accounting estimates: auditor and audit committee perspectives, overview of staff consultation paper on auditing accounting estimates and fair value, and discussion.