Going concern filings set record highs during the peak of the financial crisis, but have gradually decreased each year since then, according to a new analysis.
In the report by Audit Analytics, 2015 Going Concerns: A Sixteen Year Review, the company examined audit opinions filed with the SEC as of Aug. 4, 2016. In 2008, there were 3,354 going concerns (opinions qualified by an uncertainty regarding the going concern assumption), while 2007 had 3,311.
An estimate for 2015 predicted 2,016 going concerns – the fewest in the 16-year review. The estimate was reached by comparing how many and when going concerns were filed in 2014 (93% were filed on or before Aug. 4, 2015), and making the assumption that the same would hold true for 2015, as 1,875 going concerns were filed on or before Aug. 4, 2016.
“If this number represents 93% of the total for 2015, the ultimate number will be 2,016,” Audit Analytics said. “Therefore, the number of going concerns for 2015 year end is expected to be 214 less than the amount received for 2014.”
The decrease is attributed primarily to company attrition from the prior year’s going concerns, not improved company performance, the report states.
The percentage of going concerns is expected to drop for the seventh consecutive year. An estimated 15.1% of audit opinions in 2015 will indicate uncertainty about the auditor’s going concern assumption.
Estimates of new going concerns in 2015 predict the lowest number since 2000. Determining new going concerns offers more insight into audit opinion trends, the report states.
The number of new going concerns peaked at 1,168 in 2007. The following downward trend was slowed with slight increases in 2012 and 2014. But the report indicates that the number of new going concerns is estimated to drop to 495 in 2015. About a third (29.4%) of the 418 new going concerns filed by Aug. 4, 2016, are linked to recent initial public offerings.
“That should not necessarily be viewed as a negative economic event,” the report states.
A look at companies that filed a going concern one year but not the next indicates that the number of companies that improved enough to file a subsequent clean opinion in 2015 represented the lowest number of improved companies during the 16-year period. The number of companies that disappeared (failed to file an audit opinion) peaked in 2007 when 997 companies filed a going concern but didn’t in 2008. Of those, 200 filed a clean audit opinion in 2008, but 797 didn’t file any opinion.
Jump ahead to 2014, and of the 773 companies that filed their last going concern in that year, 650 disappeared and 123 filed a clean audit opinion in 2015. Those 123 comprise the lowest number of improved companies during the review period, the report states.
Of the going concerns reviewed in 2015, the most common reason for concern about a company’s viability related to its operating losses. Audit Analytics reviewed audit opinions to determine the issues that auditors believe undermined the going concern assumptions. They came up with 40 common reasons for their concerns about a company. Analysts selected the following top five reasons:
- Net/operating losses (including recurring losses)
- Working capital/current ratio deficit/inadequacy
- Negative cash flow from operations
- Net losses since inception
- Absence of significant revenues