The auditors of nearly one-quarter of companies feel that the companies may not live out the year.

Auditors have become increasingly doubtful about their clients’ ability to continue as going concerns, according to the most recent report on the subject by Audit Analytics, which has tracked the number of such going-concern opinions this decade in a recently released report. With calendar year-end 2008 filings still coming in to the Securities and Exchange Commission, the research firm estimates there will be 3,589 going-concern opinions eventually filed for 2008 annual reports, an increase of 9% compared to last year’s total of 3,293 going-concern opinions.

Audit Analytics made this prediction based on a compilation of regulatory filings made as of late March for 2008 10-Ks. Its data suggests auditors’ going-concern doubts were more commonplace compared to the previous year. If the firm’s estimate is correct, the number of auditors’ documented worries about their clients’ viability will reach the highest level this decade.

In 2001, 19.2% of companies noted their auditors’ going-concern uncertainty. But only 15% had those qualifications in 2003, according to the Audit Analytics report. For 2007 10-Ks, that number rose to 20.9%, reflecting the highest number of going-concern doubts since 2000. Now the total could reach 23.4% percent, the firm’s researchers say.

The audit profession has been predicting a surge in the number of going-concern doubts since last fall, when auditors were on the verge of beginning their annual reviews for calendar year-end companies amid the rough economy. Last month, on the heels of General Motors revealing its auditors’ going-concern doubts, Grant Thornton CEO Ed Nussbaum told CFO.com there will be “an unprecedented number of going-concern footnote disclosures and clarification from the auditors” forthcoming.

Auditors must consider several factors during their annual client reviews that may signal that a company won’t be in existence 12 months from now. Among them: negative recurring operating losses, working capital deficiencies, loan defaults, unlikely prospects for more financing, and work stoppages. Auditors also consider such external issues as legal proceedings and the loss of a key customer or supplier.

Auditors’ going-concern evaluations don’t stop there. If they have doubts about a company’s future, they tend to confer with their client’s management and review the company’s plans for overcoming the problems noted and decide whether those plans can likely keep the company in business. If they still aren’t satisfied, then the auditors will explain why they have “substantial doubt” about the company’s ability to stay a going concern in an opinion filed with the company’s 10-K.

In late March, when Audit Analytics compiled the data, only 10,895 auditor opinions had been filed for year-end 2008 with the SEC. That means that Audit Analytics’ forecast could be off, since the data doesn’t account for about 5,000 10-Ks that were still due. Still left to be collected was data from smaller companies, late filers, and foreign filers. But it’s likely that companies that have missed the SEC’s filing deadlines are dealing with financial issues, possibly involving discussions over a going-concern qualification with their auditors, suggests Don Whalen, research director at Audit Analytics.

To be sure, what the findings mean has yet to be determined . Still unclear is whether audit firms are being more conservative in their forecasts because regulators have indicated they will keep a close watch on going-concern opinions.

Or is it a fact that a higher number of companies have a seriously uncertain financial future? “I’m not really sure what’s driving this,” Whalen says. “Obviously, there’s a lot of economic pressure right now with the credit crunch and the dearth in consumer spending. At the same time, it might be that … auditors are being a little more cautious in their assumptions.”

Accounting firms have been criticized for not reliably raising going-concern red flags for investors before their clients file for bankruptcy protection. Past academic studies have found audit firms have made going-concern qualifications for just over half of the companies that eventually go bankrupt, according to Joseph Carcello, a University of Tennessee professor.

Last fall, in a practice alert, the Public Company Accounting Oversight Board warned auditors that companies’ ability to stay viable during the economic downturn would likely slide — effectively putting audit firms on notice that this would be at least one area high on the radar of PCAOB inspectors in the coming year. Further, the board is revising its going-concern rules to align them more with those of the Financial Accounting Standards Board.

Audit Analytics hasn’t analyzed whether certain kinds of firms were more likely to issue going-concern opinions than others. Whalen noted, however, that smaller audit firms as well as larger ones have expressed doubts about their clients’ viability. “The smaller audit firms are not shying away,” he says.

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