FASB: Let Managers Call It Quits

The board wants to give management more say in assessing whether a company is still a going concern.
Marie LeoneMay 31, 2007

Management, and not auditors, may soon have the primary responsibility of assessing whether a company is a going concern. On Wednesday, members of the Financial Accounting Standards Board voted unanimously to develop a standard that explicitly states that the duty of determining whether a company can still pay its bills, make payroll, and service its debt is in the hands of management.

Currently, the going-concern assessment is the purview of a company’s independent auditors. The rules for how to conduct the review and what types of information to evaluate are laid out in professional auditing standards written by the American Institute for Certified Public Accountants and adopted by the Public Company Accounting Oversight Board. And while management has an indirect responsibility in the matter–since executives must assert and support their position to the auditor–the accounting standards fails to spell out management’s direct accountability.

FASB intends to change that. The going-concern project is slated to be issued as an exposure draft during the fourth quarter of this year. FASB’s aim is to move the auditing literature into the accounting literature, says FASB board member Leslie Seidman. “We are of the view that [the going-concern assessment] is management’s responsibility” and that auditors should be charged with making sure the assessment is done appropriately,” Seidman told

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Prompted by the overarching effort of FASB and the International Accounting Standards Board to converge U.S. and global accounting standards, the exposure draft will likely include language used by the PCAOB and IASB—with tweaks by FASB.

For example, FASB seems to be leaning toward convergence with the IASB regarding ceding the going-concern assessment responsibilities to management and broadening the timeframe considered relevant to the assessment. Currently, U.S. auditing standards say that auditors must stick to information gleaned from audits. In terms of the time horizon, the same standards say that auditors are “not to exceed one year beyond the date of the financial statements” when identifying uncertainties—such as pending lawsuits or large debt-obligation triggers—that might affect a company’s solvency. Some FASB members, however, were in favor of stretching that scope and timeline. They discussed including all known “relevant” information about conditions and events that might impair a company’s ability to sustain operations and removing the one-year, bright-line future time horizon marker.

The accounting disclosures of companies that have filed for Chapter 11 bankruptcy protection were also discussed at the FASB session. The board has scheduled a project to decide when companies should disclose that they’re using liquidation-basis accounting. Board members questioned when a bankrupt company should disclose that it will be switching to the liquidation basis of accounting from the going-concern method. Under the liquidation basis of accounting—the use of which is usually a telltale sign to investors that a company is ready to put everything on the selling block—assets are recognized at the estimated price they can be sold and liabilities are booked at the estimated settlement amounts.

As a way to give investors a more accurate picture of whether a bankrupt company expects either to liquidate or reorganize as a going concern, several FASB board members suggested that the new standard contain language that specifically addresses changing accounting disclosures for Chapter 11.