/gō-ing kən-sûrn/
An accounting term that often comes up in the form of a warning when a company thinks it may have less than a year to live.
The phrase strikes fear in the hearts of accountants. When a company publicly uses the term “going concern,” which a lot more are doing these days, it’s almost always bad news.
A going concern is a company that will continue to operate for at least a year. But the term is rarely brought up unless a company is in trouble — that is, in cases where there are doubts it could continue as a going concern.
If managers or auditors believe that a company is at risk of going bust within 12 months, they are required to formally express that doubt in their financial accounts.
The dreaded warning is usually buried in the fine print, often reading something like, “Substantial doubt exists regarding our ability to operate as a going concern.” That usually leads to sharp declines in a company’s stock price, angst for creditors and worries among employees.
As companies have been upended by the pandemic, squeezed by high inflation and pummeled by rising interest rates, the number of going-concern warnings in company filings has spiked, according to Audit Analytics, a research firm. Following the usual pattern, bankruptcies have ensued: More companies filed for Chapter 11 in the first half of this year than in any year since 2010, according to S&P Global.
Going-concern warnings cropped up recently in filings from Bed Bath & Beyond, Vice Media and Virgin Orbit, presaging their eventual bankruptcies. Other down-on-their-luck firms that have issued warnings this year include the Chinese property developer Evergrande and the Canadian medical marijuana company Canopy Growth.
Many aspects of accounting leave room for interpretation. And since assessing a going concern passes judgment about the future, that assessment is rarely black and white.
Plummeting cash flow and ballooning debt can be obvious signs of trouble, but nonfinancial factors can also sink a business, like legal issues, changes in regulation or the resignation of a key executive.
Vaccine maker Novavax put a going-concern warning in a recent earnings report, linked to waning demand for its COVID-19 shot.
When Everton, a soccer club in England’s top division, had such a poor season that it risked being relegated to a lower, less lucrative league, that prompted a warning in its accounts.
A group of investors in Silicon Valley Bank is suing KPMG because the audit firm did not raise doubts about the lender’s ability to continue as a going concern in a filing a few weeks before its sudden and spectacular collapse.
There is “a lot of gray area” when judging whether a company is a going concern, said Denise Dickins, a former partner at an auditing firm who is now professor emeritus at East Carolina University and a board member at public companies.
But once a warning is issued, she said, “it’s almost a fait accompli that it’s going to go out of business.”
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