September 30, 2011 / 4:21 PM / 6 years ago

UPDATE 1-FASB weighs 'going concern' self-test for US firms

* Accounting rule-setters to re-examine management role

* In 'going concern' assessment, insiders may know best

* Credit crunch of 2007-2009 underlined auditors' limits (Adds links to graphic, Factbox)

By Dena Aubin

NEW YORK, Sept 30 (Reuters) - U.S. accounting rulemakers are expected to revisit soon a 2008 proposal that would address the knotty issue of "going concern" warnings, seeking to better assure that alarms are sounded before companies fail.

At issue are the standard warnings that auditors are required to include in annual reports when they have substantial doubt that a company will survive.

With lucrative audit fees on the line, auditors have been accused of failing to flag going concern doubts, though some proposed changes could create new frictions between auditors and managers, some experts have said.

The 2008 Financial Accounting Standards Board proposal contemplates making companies themselves responsible for warning when there is a risk that they may not be able to continue as a going concern. In the past, this job has been mostly the duty of their auditors.

A lack of going concern warnings for banks that got into trouble in the 2007-2009 global credit crisis was a black eye for the audit profession and triggered calls for reform.

Only two of the 10 largest bankruptcies in the credit crisis had going concern opinions from auditors, according to members of an auditor watchdog group.

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FACTBOX-Big US bankruptcies,audit warnings [ID:nS1E78S1OC]

Graphic - 'Going concern' warnings 2005-2110:

link.reuters.com/huk24s

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FASB's proposal would essentially bring U.S. standards closer to international rules, which already require companies to make going concern assessments, with checks by auditors.

Though the proposal was put on hiatus because of other priorities, it is expected to be back on the board's agenda soon, said Christine Klimek, spokeswoman for FASB, the private Norwalk, Connecticut, group that sets accounting standards for U.S. public companies.

FASB has said it plans to revise the original proposal because of issues raised in comment letters, and it is still uncertain what its final rule will look like.

Many auditors think managers should be assessing their going concern status.

"You're dealing with a forecast of what will happen over the course of the next year or so ... that is something that is best done by management," said Peter Bible, a partner at accounting firm EisnerAmper and former chief accounting officer for General Motors Co (GM.N).

"We can test the assumptions they (managers) use, but to develop that is just not in our wheelhouse," he said.

U.S. AUDITOR WATCHDOG ALSO INVOLVED

The assumption that a company is a going concern underlies almost every financial statement, justifying the way its assets are priced. Unless a company will survive to derive value from its assets, the assets have to be priced based on what they would fetch in a liquidation.

Because managers prepare the financial statements, many accounting experts say it is only logical that they need to assess whether their business is a going concern.

FASB's proposal would make managers disclose when they have substantial doubt about their company's ability to remain a going concern, but auditors would not be off the hook.

In fact, the main U.S. auditor watchdog group has been looking into tightening auditor standards since receiving complaints about the large number of companies that failed during the financial crisis without an auditor's red flag.

"The auditor has a responsibility under federal securities law and our standards today to evaluate whether there's substantial doubt about a company's ability to continue as a going concern," said Keith Wilson, deputy chief auditor at the Public Company Accounting Oversight Board.

"We are reviewing with FASB and the Securities and Exchange Commission whether improvements can be made."

WARNINGS CAN BE DEATH KNELL

Auditors are reluctant to issue a warning that can amount to a death knell for some companies, causing investors to flee and credit to dry up, accounting experts said.

Audit fees can also be at stake.

Even if a company survives, an auditor is two to three times more likely to lose a client receiving a going concern warning than a similarly distressed company that did not get one, according to Marshall Geiger, an accounting professor at the University of Richmond.

FASB's proposal would make the going concern process more complicated, Geiger said.

"I do think there's going to be this friction now between what management says and what the auditor says," he said. If an auditor issues a going concern warning that is contrary to the company's opinion, "I'm not sure how that is going to be resolved," he said.

Managers would be hesitant to publish a going concern warning that could be a self-fulfilling prophesy, he said.

"It makes it pretty difficult on management to come to the plate, particularly at a difficult time in the company's life, and say publicly, 'We're not sure if we're going to be around next year,'" Geiger said. (Reporting by Dena Aubin. Editing by Kevin Drawbaugh)

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