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