Tuesday, September 25, 2012

"Going Concern" Explanatory Does Not Always Mean that the Sky is Falling

50 years ago or so, one of the books my parents would read to me at night was "Chicken Little."  The story, as best as I remember it, involved a juvenile chicken who announced after a drop of rain fell on his head that the sky was falling--and convinced many of his young friends to join in the panic.  Periodically, one sees similar behavior in the business world; one present example being the widespread belief that a going concern explanatory paragraph inherently will lead to a (most likely Chapter 11) bankruptcy filing.  Peter Bible of EisnerAmper CPA firm points out that bankruptcy is NOT inevitable from a going concern expression and that converting financials to a liquidation basis is not necessary needed or even appropriate.

I have to acknowledge that Mr. Bible's advice is probably the reason that going concern opinions are uncommon, particularly among publicly-traded businesses.  In theory, it seems that going concern issues should be a significant red flag and I have even considered calling for a qualified opinion in the case of significant going concern anxieties.  Maybe I have done a small-scale Chicken Little here--guess there is a reason that I am in academia and not in practice.


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