[Here's some more transparency for you, Doug. Consider: What good is it to be told that a car appears to be in good working order and is currently traveling at 80 mph if you're not simultaneously informed that it is approaching a brick wall 30 feet ahead? Warm regards, V.I. Lenin]
Wall Street Journal Feb. 8, 2001
'Going Concerns': Did Accountants Fail To Flag Problems at Dot-Com Casualties?
By Jonathan Weil
It's a going concern. But where is it going -- out of business?
Look closely at nearly any company's annual financial statements, and you'll notice an obscure yet important qualifier. They are prepared to on the presumption that the company is a "going concern" -- that is, that it will continue as a business for at least another 12 months. And if an auditor has substantial doubt about a client's ability to continue as a going concern, it must say so in its report on the company's financial statements.
Investors often take those warnings, commonly call "going-concern clauses," to mean "run for the hills," and the inclusion of one can kill a company's plans to go public. Next month, as most companies file annual reports, dozens of flailing dot-coms are expected to disclose they have been tagged with that dreaded boilerplate.
But what about last year's crop of failed dot-coms? Of the 10 publicly owned dot-coms whose financial problems forced them to cease operations or file bankruptcy-court proceedings, only three had going-concern clauses at the time they shut down. And one of those three didn't have a going-concern clause in its annual report last spring, but instead got one from its auditor three months later -- after the stock had tanked. Among the flameouts that sported clean auditor opinions: Pets.com, Quepasa.com and MotherNature.com. All 10 were audited by Big Five accounting firms. ...
[R]ather than questioning the sustainability of the [technology stock] bubble at a time when some dot-coms had stock-market valuations of several hundred times their revenues, critics say many auditors appear to have presumed the capital markets would remain buoyant. "For anybody to have assumed a continuation of those aberrant, irrational conditions was itself irrational and unjustifiable, whether it was an auditor, a board member or an investor," says Gary Lutin, a former investment banker who runs forums on financial-reporting practices for the New York Society of Security Analysts.
In fact, current auditing standards provide no guidance about how firm a company's financing commitments must be to pass muster.
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