Posted: August 9th, 2016
“George, I know you have high hopes that things will get better soon, but this time things are a little different,” Mark sighed. “I know that you might just be able to pull the company out of this. But given the circumstances, I think we’re going to have to look at including a going-concern explanatory paragraph in the audit report. I substantially doubt that Surfer Dude will be able to continue as a going concern for the next year. I also recommend that you include a footnote in your financial statements to the same effect.”
“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.
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?
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