First the good news: fewer companies are carrying around the burden of a going-concern qualification. Based on regulatory filings as of May 31, research firm Audit Analytics predicts that a total of 2,875 companies will report that their auditors expressed doubts about their viability for their 2010 financial reports. That would be a slight decrease from the previous year and a 13.6% fall from the peak number of qualified audit opinions made in 2008. “Companies are getting out of this bad cycle,” says Don Whalen, director of research at Audit Analytics, which looked only at companies registered with the Securities and Exchange Commission.
Now the bad news: the numbers are still high. And the drop in qualifications has more to do with companies dropping out of the public-company sector, being acquired, or — confirming their auditors’ predictions — going bankrupt. For example, of the 2,994 companies that filed a going-concern qualification in 2009, 172 terminated their SEC registrations
Fewer companies that filed a qualified audit opinion in 2010 were rejoining or were new to the group. In fact, the number of “new” going-concern qualifications has decreased every year since 2007 and has hit its lowest number for the past decade. Audit Analytics estimates that 28% of the companies with a going-concern qualification in 2010 did not have a qualified audit opinion in 2009. On the other hand, more than half of companies that filed a qualified audit opinion for their doubtful going-concern status in 2010 also did so in both 2008 and 2009.
Auditors consider several factors during their reviews that may lead them to predict a company’s demise is imminent. 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
Just over 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 included the status of developing companies (mentioned in 1,027 of the opinions), working capital deficiencies (884), and net losses since inception (732).