Posted: May 5th, 2016

How might a going-concern explanatory paragraph become a “self-fulfilling prophecy” for Surfer Dude?

“What? Mark, you can’t go slapping a going-concern report on me! Surfer Dude will go belly-up for sure. No one will be willing to loan us any money. Shoot, nobody will even be willing to sell us anything on account—all our inventory purchases and everything else will be C.O.D. It’ll be cash-and-carry only. And what about our customers? Will they buy if they’re not sure we’ll be there to stand behind our return policy? It’ll be your report that puts us under, not the ripples we’re hitting now. I’ve got a feeling things are going to get better soon. We just need a little more time.”

“George, you’ve got to consider the consequences if….”

“Mark, if you slap me with a going-concern report, there is no way we’ll be able to pull out of this. Think of all the people who will lose their jobs if Surfer Dude shuts down. Please, I’m asking you to at least think about it.” George’s ever-present smile was gone.

Mark was silent for what seemed like an eternity. “Okay George, let’s both think about it over the weekend. I’ll drop by on Monday morning so we can work this out. Thanks for your time.”

Mark walked slowly out of the building and to his car. This was not going to be a relaxing weekend.

Requirements
1. What are Mark’s options?
2. How might a going-concern explanatory paragraph become a “self-fulfilling prophecy” for Surfer Dude?
3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph?
4. Discuss the importance of full and accurate auditor reporting to the public, and describe possible consequences for both parties if the going-concern explanatory paragraph and footnote are excluded. How might Mark convince George that a going-concern report is in the best interests of all parties involved?
5. How appropriate is it for an audit partner to have a friendly personal relationship with a client?
6. What factors should motivate Mark to be objective in his decision, despite his personal concern for his friend?
7. In your opinion, what should Mark do?