Last year ended on a somewhat optimistic note, as economic growth finally moved back into positive territory. However, based on their evaluations of 2009’s financial reports, many auditors are still worried about their clients’ prospects for survival.
In fact, accounting firms expressed doubts about public companies’ financial viability in their 2009 opinions at about the same rate they did in 2008 (see chart below). Research firm Audit Analytics predicts that 19.8% of audit opinions filed for year-end 2009 will have a going-concern qualification, compared with 20.3% of 2008 opinions. (Researchers pulled the data at the end of April, when many foreign companies and the smallest U.S. public companies with a fiscal year-end had not yet filed their 10-Ks.)
The latest data does reflect a slight dip, from 3,275 going-concern qualifications in 2008 to an estimated 3,007 in 2009. But the drop “wasn’t for the reason you would hope,” says Don Whalen, director of research at Audit Analytics. Rather than sending a hopeful signal about companies and the economy, the drop reflected the fact that accounting firms simply had fewer public companies to evaluate in 2009.
Of companies that received a going-concern qualification in 2008, 8.4% are no longer registered with the Securities and Exchange Commission, according to Audit Analytics. Overall, based on the research firm’s estimates, the SEC will receive 518 fewer auditor opinions for 2009 10-Ks, compared with 2008.
The slight year-to-year change for going-concern qualifications isn’t surprising, says Joseph Carcello, an accounting professor at the University of Tennessee. Even though 2008 ended on a dark note following steep stock-market declines, massive write-downs, and general uncertainty across industries, 2009 gave people only “a somewhat more positive business outlook,” he says.
Auditors consider several factors during their reviews that may herald a company’s eventual demise. Among them: recurring operating losses, working capital deficiencies, loan defaults, unlikely prospects for more financing, and work stoppages. Auditors also consider external issues, such as legal proceedings and the loss of a key customer or supplier.
More than half of the qualified audit opinions made last year listed net operating loss as a reason for their doubts about their clients’ future. Other top reasons cited included working capital deficiencies (in 856 of the going-concern qualifications), accumulated retained earnings deficit (625), and net losses since inception (575).