COVID-19 AND GOING CONCERN REPORTS

Brief Summary:

• Companies are required to disclose any significant concerns about their ability to operate for 12 months following the release of their financial statements; independent of that disclosure, auditors are required to evaluate the companies ability to operate and modify their report on the financial statements if they believe substantial doubt exists about the entitys ability to continue in existence.
• The COVID-19 pandemic severely affected companies in the travel, leisure, and entertainment industries. However, for companies with calendar year-ends, the effects of COVID-19 were still largely unknown at the time of the audit of their 2019, 2020 and even recent 12/31/2021 financial statements, so the impacts of COVID-19 had not been fully reflected in their financial statements or auditors reports.

Important Note: Both management of a company as well and auditors have responsibility for going-concern disclosures. As an example of how these responsibilities may result in conflicting signals involves Sears Holding Corporation. While Sears management disclosed substantial doubt about going concern in its Form 10-K, Sears auditor (Deloitte) issued a standard unqualified opinion. (Sears subsequently filed for bankruptcy protection and was delisted from the NASDAQ in 2018).

Question:

The various consequences to auditors of issuing going concern opinions (client dissatisfaction, self-fulfilling prophecy if client is unable to obtain additional financing) or not issuing going concern opinions (potential liability to auditors).