“Going Concern” Warnings: Fewer Firms Improved in 2012 and Its Impact on Investors

A recent article by the Wall Street Journal’s Vipal Monga highlights the importance to investors of an early warning that sends signals about the future of a company’s ability to continue operating as a viable entity. Monga draws attention to a recent Audit Analytics report that shows only 140 companies (out of 2,345 new and repeat going-concern filings) improved their condition last year after a warning about their financial health in 2011. This is down from the previous year, in which almost one-third showed improvement.

As I wrote in a July blog post, “Investor Win: FASB Proposes Enhanced “Going Concern” Warnings for U.S. Firms,” a basic tenet of financial reporting for any business entity, whether public or private, is that its financial statements are prepared based on the presumption that the entity will continue to operate as a going concern. Essentially, will that entity meet its financial obligations as they come due, and does it possess sufficient liquidity and capital resources to continue operating for the next 12 months or so?  If not, investors should know about it — in fact, the sooner the better.

With only a small number of entities reporting improvements, investors are closely following separate initiatives of the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB) to improve the way both company management and the independent auditor report the company’s future financial health. For our part, CFA Institute believes that investors will benefit from expanded disclosure of a company’s financial health, including the future business risks and uncertainties from those in the best position to know.

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