U.S. investors urge 'going concern' warning reform

Wed Mar 28, 2012 5:40pm EDT

* Investors want revamp of 'going concern' rules

* Enforcement sought on lack of auditor warnings

* Auditors risk irrelevance - former SEC official

By Dena Aubin

March 28 (Reuters) - Regulators need to crack down on auditors who fail to warn investors and the public before corporations fail, investors told the main watchdog for U.S. auditors on Wednesday.

Most big companies bailed out by the government in the 2007-2009 financial crisis had clean bills of health from their auditors and no auditors have been disciplined over this, investors told the Public Company Accounting Oversight Board at a meeting in Washington.

If auditors "continue on the track they're on, two decades from now, they'll no longer be relevant at all," said Lynn Turner, former chief accountant for the U.S. Securities and Exchange Commission and a member of a PCAOB advisory group.

Recently it was analysts, not auditors, who disclosed problems at companies such as Olympus Corp, Diamond Foods Inc and troubled China-based companies, Turner said.

His remarks came at a meeting of a PCAOB investor advisory group that is looking at ways ensure investors get earlier warnings before companies collapse.

Audit standards require auditors to warn investors when a company appears to be at risk of no longer being a "going concern." But auditors are reluctant to issue such warnings, which can be a company's death knell, causing credit to dry up.

Audit fees, ranging in the tens of millions of dollars for large companies, are also at stake in such situations.

FEW WARNINGS ON LARGE COMPANIES

Audit standards and company disclosures both need to be improved so investors are told when a company's financial condition begins to weaken, not just when failure is imminent, Turner and other investor advocates said.

"The current definition of 'going concern' means you're pretty much over the edge of the cliff - it's almost too late to do anything," said Anne Simpson, head of corporate governance at the California Public Employees' Retirement System, the biggest U.S. public pension fund.

Current rules require a warning when the auditor has substantial doubt about a company's ability to continue as a going concern, which is too high a hurdle, investors said.

The "substantial doubt" standard should be changed to "more likely than not," investors recommended to the PCAOB.

Either the SEC or accounting standard setters should require companies to disclose how they are performing on industry metrics, such as sales backlogs and shipments, so investors know trends and risks, Turner said.

Those performance metrics "are typically some of the best red flag warnings you can ever see," Turner added.

The assumption a company is a 'going concern' is the starting point for any financial statement, justifying the way its assets are priced. If a company will not survive to get value from its assets, they have to be priced based on what they would fetch in a liquidation.

Yet current auditing standards do not require auditors to design the audit to specifically look for a company's going-concern status, Turner said.

Auditors are also issuing many more 'going concern' warnings for smaller companies than large ones, said Damon Silvers, policy director for the AFL-CIO labor union.

"We have a major double standard here," Silvers said. "There's nothing about failure that is unique to small firms."