Living with a Scarlet Audit Letter

Given a going-concern qualification, companies struggle to defy their auditors' prediction that they won't survive the year.

“Depending on the nature of the relationships with counterparties, frequent, early, and frank communication of issues and the way forward can often be an approach that can be successful,” advises Chris Wright, managing director at consultancy Protiviti.

Rod Sherwood, CFO of radio network Westwood One, has had to stay in frequent contact with creditors and business partners since his company received a going-concern qualification earlier this year. “It’s key to anticipate where the company is headed and the impact of an uncertain economy well ahead of time, so that you can take action and proactively renegotiate any agreements so you’re ahead of any events that would occur,” says Sherwood.

Sherwood’s most recent renegotiation was with debt holders. Last week, the company announced it will avoid default by securing a waiver with senior note holders and a lender on debt covenants that would have been measured December 31. The more lenient terms come with a price tag, of course: the company has promised to put $15 million toward paying down senior notes, assuming an upcoming stock offering is successful and a sale-leaseback of one of its properties occurs by March (if those two sales don’t occur under the terms, then the company will have to pay down $3.5 million of its senior notes).

Reworking finances has been Sherwood’s main task since joining Westwood One more than a year ago. After the company reported a net loss of $427.6 million for 2008 and a 10% decline in revenue, its accounting firm, PricewaterhouseCoopers expressed its doubts about Westwood’s viability, citing the fact that the company had overdue debt. The company had been in the process of refinancing, but didn’t strike a deal until after its annual report was issued.

As if Westwood didn’t have enough headaches reassuring business partners and suppliers, its customers — advertisers — are well aware that many media properties are in dire straits. “We worked hard to make sure that our advertising customers knew that we would be around for the future, and that we had the right momentum in the marketplace to continue focusing on revenue generation and top line growth over time,” Sherwood tells CFO.com.

Accounting experts recommend companies consider looking at their going-concern status now, even if they’re only at the half-way mark of their reporting year (most companies’ annual reports aren’t due until early next year). “To have a going-concern discussion [with your auditor] toward the end is not a good thing to do,” says Russ Wieman, national partner of audit and advisory services at Grant Thornton. “It’s a complicated issue that needs a lot of discussion, a lot of vetting. Putting it off could put you at risk for not delivering your audited financials on time.”

According to Mike Kelly, managing director and leader of the strategic value advisory practice at financial advisory firm Duff & Phelps, auditors are increasingly expecting companies to do self-assessments of their going-concern risk before they’ll reach their own conclusion. “Auditors have a higher expectation that management will assume greater responsibility for the going-concern risk assessment process,” Kelly says.

Standard-setters have a similar expectation: Next month, the Financial Accounting Standards Board will revisit a proposed rule that would formalize management’s responsibility when it comes to considering a company’s going-concern status. While companies opine on their viability in annual reports, there is currently no accounting rule that governs how they do so.

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