In an article entitled, "American Gaming Says Its Chairman Resigns; Audit Raises Questions," The Wall Street Journal (April 14, 1996, p. A6) reported that the board chairman of a publicly traded company had resigned, and that the company faced financial difficulties. On the matter of financial difficulties, the article stated, in part,

". . . the company said an independent audit by Deloitte & Touche found that American Gaming's problems—including recurring losses, negative working capital, defaults under debt agreements and uncertainty relating to the liquidation of subsidiaries—'raise substantial doubt about the ability of the company to continue as a going concern.'"

The article made no link between the chairman's resignation and the auditor's opinion, but did appropriately link American Gaming's financial position to the opinion.

At a meeting between Christine Schutt, an engagement partner assigned to audit a middle-market building materials company, and the company's chief executive officer (CEO), Schutt reveals that she has substantial doubt about the company's ability to continue as a going concern and that she may have to add an explanatory paragraph to the audit report. The CEO says, "I understand your dilemma. You've explained that to me. But what you don't understand is that no supplier will give me credit, even for a week, if you claim you have substantial doubt. What's more, a statement like 'substantial doubt' may cause me to think twice about resigning. Look, if you'll say in your report that you have doubt, I'll buy that, and my creditors may too. But, if you insist on substantial doubt, I'll find another auditor."

Required:

1. Do you think Schutt can overlook the word "substantial"? Discuss.

2. What is the dilemma the CEO explained to Schutt? Discuss.