Auditor "going concern" warnings seen peaking in '09

NEW YORK (Reuters) - The number of "going concern" warnings by corporate auditors could hit an all-time high this year, as the U.S. recession has put the survival of hundreds of companies in doubt, the chief executive of accounting firm Grant Thornton predicted on Thursday.

Every year, U.S. auditors are required to say when they have substantial doubt about whether a company can survive for another 12 months. Auditors' so-called "going concern opinions" are included in companies' Form 10-K annual reports filed with U.S. regulators, and sometimes can put companies in violation of their loan covenants.

"I'm sure we will see a very high percentage -- much higher than ever before -- of companies receiving going concern opinions," Ed Nusbaum, chief executive of Grant Thornton, said in an interview.

Auditors must make their decisions over the next few weeks, and Nusbaum, who heads the sixth-largest U.S. accounting firm, measured by revenue, said there is a risk that many will "get it wrong" this year.

"As we've seen over the last three or four months, markets can change so dramatically," Nusbaum said. "There's no doubt that many going concern opinions will be issued for companies that will survive, and likewise there will be companies that don't get going concern opinions that won't survive."

Automaker General Motors Corp (GM.N) said on Thursday it expects to receive a going concern opinion from its auditors this year, but many more companies should also expect to receive such opinions, Nusbaum said.

While he did not have exact numbers, he said auditors have never before considered giving so many going concern opinions.

"So many companies are being dramatically impacted by the recession, whether it's the fair market value of securities, or a slowdown in manufacturing or oil prices," Nusbaum said.

Nusbaum said investors should expect a slew of going concern opinions in automotive, manufacturing, financial services and retail companies.

In fact, the issuance of auditor going concern opinions has climbed sharply since 2001, according to a December study by professors at the University of Arkansas and Texas A&M University.

The study showed that going concern opinions were issued for 52 percent of distressed and subsequently bankrupt companies in 2001, and that the proportion rose to 72 percent after December 2001.

After the collapse of Enron and its auditor Arthur Andersen, the risk that auditors could be sued for failing to issue a going concern opinion is something that auditors keep in mind when making decisions about the issue, Nusbaum said.

"The risk of litigation is significant and in many cases the only option is to issue a going concern opinion ... there is a legal motivation," Nusbaum said.

But ultimately the trouble in the credit markets and uncertainty about how the economy can recover has put both companies and auditors in a tough position this year, Nusbaum said.

"It's based on estimates of what's going to happen to the company. You're looking at whether the company can survive, whether it has the ability to obtain credit, and what it means to survive," Nusbaum said.

All of those things are difficult to ascertain in the current environment.

(Reporting by Emily Chasan; Editing by Gary Hill)