http://blogs.wsj.com/cfo/2015/01/02/study-going-concern-letters-on-decline-but-that-may-not-be-good/?mod=WSJ_hpp_sections_cfo

January 2, 2015, 9:12 AM ET

Study: ‘Going Concern’ Letters on Decline, But That May Not Be Good

JOHN KESTER

Reporter

Warnings to struggling companies are decreasing, but dead companies can’t be audited.

That’s part of the message from a new Going Concern Report by Audit Analytics. Fewer companies in the 2013 fiscal year saw red flags raised over their ability to continue as a going concern than did during the 2012 fiscal year. But that’s partly because many businesses closed up shop.

Audit Analytics estimates that 2,384 companies received “going concern” warnings for the 2013 fiscal year. That’s nearly a  6% drop from 2012. However, 207 companies that received such warnings in 2012 filed terminations and no longer exist.

“That’s not a good thing…you figure there’s some kind of economic pressure on companies,” said Donald Whalen, director of research at Audit Analytics. “You get a mixed bag if you just simply look at the number of going concern [warnings].”Auditors consider companies going concerns when those companies are expected to continue functioning, but qualify that opinion when they think the business may fail.

Financial Accounting Standards Board updated U.S. accounting rules last August, which go into effect by the end of 2016, defining management’s responsibility in evaluating whether their business will be able to continue operating as a going concern, and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

Some 505 companies that received warnings in 2013 were “new,” or didn’t receive such a warning in 2012, estimated Audit Analytics. That’s the lowest number since the firm began reporting such figures 13 years ago.

Companies are “not getting better but they’re not getting worse,” Mr. Whalen said. “At least we’re not getting a lot of new going concerns.”

More than half of the new warnings – 59% – were related to initial public offerings. For IPOs, going concern warnings may reflect that an auditor cannot fully predict the future for a nascent company with no track-record, Mr. Whalen said. Moreover, he said, a large number of IPO-related opinions may indicate more companies are joining the market, a positive for the economy.

Yet 2013 saw the second smallest number of companies pull themselves out of their going concern troubles. Companies can put going concern problems behind them by filing an audit free of going concern qualifiers in the following year. Others can leave the problem list through what Audit Analytics calls “subsequent disappearance” — simply ceasing to file audit opinions. Only 183 of the 2,532 companies that received a warning in 2012 filed so-called clean audits in 2013, according to the report.