I just want to ensure I am on the right track. The question I would like an answer to is "Should HT be assigned a going concern classification ? why or why not? Consider whether the amounts in question would be material (i.e., impact the decision-making of investors)."

ISSUES IN ACCOUNTING EDUCATION Vol. 28, No. 1 2013 pp. 77-92 American Accounting Association DOI: 10.2308/iace-50298 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics James L. Bierstaker, Thomas F. Monahan, and Michael F. Peters ABSTRACT: Many students have not spent much time studying or contemplating the importance of non-GAAP (Generally Accepted Accounting Principles) earnings to the ''Street.'' Based on the facts of an actual company and utilizing the financial information drawn from this company's 10-K and Earnings Release, this case introduces students to the strengths and weaknesses of GAAP and non-GAAP earnings measures, and why the Street might be more interested in cash and recurring earnings in attempting to predict movements in stock price. It also provides the instructor with an opportunity to discuss the dangers of allowing firms to emphasize earnings in their press releases that are not defined by an external authoritative body (such as the Financial Accounting Standards Board [FASB]), and how this can hurt the consistency and reliability of reporting. This is an important discussion, since regulators have recently formally proposed to include non-GAAP measures in their overhaul of the auditor reporting model (Public Company Accounting Oversight Board [PCAOB] 2011). The case also familiarizes students with current auditing guidelines dealing with the going concern decision and the potential role that non-GAAP earnings can play in this decision. Thus, the three primary learning objectives are to teach students: (1) to apply going concern audit standards, (2) about the potential role of non-GAAP earnings in this decisionespecially as a predictor of future cash flows, and (3) other issues associated with non-GAAP earnings. This topic is important, as auditors are frequently auditing companies that release non-GAAP earnings and/or have going concern issues. This case can be used in Intermediate and Auditing classes, as well as master's-level courses. Keywords: GAAP; going concern; non-GAAP nancial measures; PCAOB audit model. INTRODUCTION Y ou have recently been assigned to HT Company as a staff auditor. HT is a technology company that began a few years prior to the dot-com debacle and operates in a very competitive environment. The senior on the job has asked you to provide an initial analysis of whether HT should be classified as a going concern and to identify potential audit issues associated with non-GAAP earnings. Since this is a new assignment, you set out to build your James L. Bierstaker is an Associate Professor, Thomas F. Monahan is a Professor, and Michael F. Peters is an Associate Professor, all at Villanova University. Published Online: September 2012 77 78 Bierstaker, Monahan, and Peters background on HT's industry, the history of the company and their product and service lines, and their overall competitive position in the industry. Industry Background HT Company operates in a technology niche that helps companies manage how they spend money on their business. In the last decade, technology-based solutions have emerged to help companies increase the efficiency of the procurement and cash management processes and, as a result, more effectively manage their spend (i.e., operating expenditures). These solutions allow organizations to automate critical tasks such as identifying global suppliers, sourcing goods and services, negotiating and managing contracts, processing invoices and payments, and managing trading relationships. Procurement organizations were among the first to embrace spend management solutions as a way to achieve corporate savings targets. Today, finance departments are leveraging these solutions to drive improved cost management, business unit decision making and planning, budgeting, forecasting, and cash and working capital management. Legal departments are implementing them to more effectively author and manage contracts, and IT departments are deploying them to enhance the value of existing systems and increase returns on investment. Overview of Company In its 10-K, HT describes itself as the leading provider of on-demand spend management solutions, which are ways of monitoring operating expenditures such as raw materials, legal, administrative, etc. Its mission is to transform the way companies of all sizes, industries, and geographies operate by delivering software, service, and network solutions that enable them to holistically source, contract, procure, pay, manage, and analyze their spending and supplier relationships. Delivered on demand, its enterprise-class offerings empower companies to achieve greater control of their operating expenditures and to drive continuous improvements in financial and supply chain performance. The company claims that HTt Spend Managemente solutions are easy to use, cost effective, and quick to deploy and integrate with enterprise resource planning (''ERP'') and other software systems. More than 1,000 companies, including more than half of the 2011 Fortune 500 companies, use HT solutions to manage their operating expenditures, from sourcing and orders through invoicing and payment. HT was incorporated in Delaware in September 1996 and went public in 1999. The company's stock price moved from $944.30 per share on August 1, 2000, to $99.00 per share on February 1, 2001, and settled at $13.68 per share on August 1, 2001. This represented a 98.5 percent reduction in price over a one-year period, while the founders took out a considerable amount of money from stock sales over a two-year period prior to the stock's collapse. This resulted in a Securities and Exchange Commission (SEC) investigation and the resignation of the CEO and chairman of the board, along with most of the other board members. The newly hired CFO became CEO and has run the company successfully for the past ten years. Sourcing and Procurement Software Market In a 2011 Supply Management Market Sizing Report, AMR Research, a third-party research firm, projected the spend management market to grow at 10 percent Compound Annual Growth Rate (''CAGR''), becoming a $4.3 billion market in 2015 (i.e., $4.3 billion in revenues). Further, it noted that the highest growth segments within the spend management market over the next five years are projected to be in areas in which HT participates (CAGR in these areas is predicted to be Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics 79 between 10-11 percent). Contract management is another area that HT is expected to be involved with, and this area is also expected to grow substantially during 2012 and 2013. Competition You recognize that the market for spend management applications is highly competitive, rapidly evolving and fragmented and subject to changing technology and shifting customer needs. Moreover, the following description in HT's preliminary 10-K makes you feel somewhat uneasy:1 Our principal direct competition comes from ERP vendors whose software is installed by customers directly. We also compete with specialty vendors that offer their software on a hosted basis or under a perpetual license. In our services business, we compete with several large and regional service providers. We anticipate additional competition from other established and emerging companies as the spend management market continues to expand. Our current principal competitors include: \u0002 \u0002 \u0002 \u0002 Enterprise software application vendors, including SAP AG and Oracle; Smaller specialty vendors, including Emptoris, BravoSolution, Zycus, and American Express S2S; Smaller niche SaaS vendors, including Perfect Commerce, cc-Hubwoo, Ketera Technologies, and Iasta; and Service providers, including A.T. Kearney and McKinsey & Company. We believe the principal competitive factors considered with respect to, and the relative competitive standing of, our spend management software solutions are: \u0002 \u0002 \u0002 \u0002 \u0002 \u0002 \u0002 Interoperability with existing commonly used ERP systems; Ease of use and rates of user adoption; Price and demonstrable cost-effective benefits for customers; Performance, security, scalability, flexibility, and reliability of the software; Vendor reputation and referenceable customers; Quality of customer support; and Financial stability of the vendor. Many of our current and potential competitors, such as ERP software vendors, including Oracle and SAP, have longer operating histories, greater name recognition, larger marketing budgets and significantly greater resources, and a larger installed base of customers than we do. They may be able to devote greater resources to the development, promotion, and sale of their products than we can to ours, which can enable them to respond more quickly to new technology, introduce new spend management modules, and respond to changes in customer needs. In addition, many of our competitors have wellestablished relationships with our current and potential customers and have extensive knowledge of our industry. In the past, we have lost potential customers to competitors for various reasons, including lower prices and other incentives not matched by us. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address 1 This disclosure is adapted from a company's actual 10-K. Companies will often disclose these types of risks in an attempt to avoid investor litigation. Issues in Accounting Education Volume 28, No. 1, 2013 Bierstaker, Monahan, and Peters 80 customer needs and achieve greater market acceptance. The industry has experienced consolidation, with both larger and smaller competitors acquiring companies to broaden their offerings or increase scale. As a result, we may not be able to successfully compete against our current and future competitors. HT's GAAP Financial Performance Over the past few years, HT Company has experienced strong growth in revenue from its existing product lines (i.e., particularly, the recurring high growth revenue from cloud computingbased subscriptions has increased 31 percent from 2010 to 2011), but has been unable to generate positive income from operations. In fact, during fiscal year 2011, its overall revenue increased 8 percent while, at the same time, its net loss before income taxes increased from $13 million (in 2010) to over $40 million (in 2011). However, HT maintained a significant cash balance, experienced strong cash flows over this two-year period, and enjoyed limited leverage (see Appendix A). Rationale for Reporting Non-GAAP Earnings HT's financial performance (as viewed from a GAAP income statement perspective) is less than impressive. Over the years, however, HT has emphasized the importance of non-GAAP earnings, especially to investors. As often discussed by HT and the Street, the basic argument for reporting non-GAAP earnings is that these numbers more accurately capture financial measures that are comparable across years and across firms and that will impact future operations. Non-GAAP earnings are often referred to in press releases. The non-GAAP financial measures disclosed in Company press releases are thought to be used by boards of directors and senior management teams to evaluate operating performance. NonGAAP adjustments represent certain income statement items that are non-recurring and/or noncash, although not every adjustment fits into these two categories. In addition, the use of a particular non-GAAP adjustment may differ based on the type of analysis. For example, investors may use certain non-GAAP adjustments for valuation purposes (i.e., as proxies for recurring cash flows) while auditors may use different non-GAAP adjustments for going concern assessments. As a result, the non-GAAP adjustments that are arrived at by an investor may differ from the non-GAAP adjustments that are arrived at by an auditor. In the case of HT, although it had three years of GAAP losses, the firm's stock price increased from around $7 to $18 over this same period. This raises the issue that non-GAAP earnings could have an important impact on company valuations. See Appendix B for HT's non-GAAP adjustments. Going Concern Provisions The going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial changes to their operations (i.e., disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions). The time period generally used for measuring a going concern is not to exceed one year beyond the date of the financial statements being audited. Once the auditors believe there is substantial doubt about the entity's ability to continue as a going concern, they should obtain information about management's plans to mitigate the effect of such conditions or events, and assess the likelihood that such plans can be effectively implemented. The current audit guidelines for determining a going concern are presented in detail in Appendix C. This information on the competitive risk faced by HT, its net losses over the past few years, its positive non-GAAP earnings over this same time period, and the role of non-GAAP earnings in Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics 81 general has raised the issue of a going concern for the audit team. In addition, you recognize that the audit is targeted at GAAP and that there is no requirement to audit non-GAAP earnings (however, the audit of non-GAAP earnings is under review by the PCAOB). CASE QUESTIONS 1. In reviewing Appendix C (''Current Auditing Guidelines Dealing with a Going Concern''), comment on which provisions are most applicable to this case. (a) Should HT be assigned a going concern classificationwhy or why not? Consider whether the amounts in question would be material (i.e., impact the decision-making of investors). For example, a cash-only business would not have a material amount of receivables. Use Appendices A and B to support your answer. (b) Identify key ratios derived from the financial statements that: \u0002 \u0002 Support your position regarding a going concern. Do not support your conclusion regarding a going concern. For example, profit margins (net income/sales) would potentially support a going concern qualification, whereas free cash flow percentage (operating cash flows/investing cash flows) may not. Note: see the following link for common ratio formulas: http://beginnersinvest.about. com/od/financialratio/Financial_Ratios.htm 2. As the staff auditor examining this issue, your audit team has asked you to provide brief summaries about the following with regard to non-GAAP earnings (see Appendix B): (a) In general, why do firms report non-GAAP earnings? (b) In general, are certain components of non-GAAP earnings more appropriate for certain decisions (e.g., going concern), but not so for other decisions (e.g., valuation)? Note: you may find it helpful to consult Regulation G, which provides the SEC rules for disclosing non-GAAP metrics and reconciling non-GAAP and GAAP earnings (see the link below): http://www.sec.gov/rules/final/33-8176.htm For current research on non-GAAP earnings, see Curtis et al. (2012) at the following link: http://www.business.utah.edu/sites/default/files/documents/school-of-accounting/ whipple_2nd_year_paper.pdf In addition, the Canadian Institute of Chartered Accountants (CICA) has a document on non-GAAP earnings that may serve as helpful background reading. It is available at: http://www.cica.ca/publications/list-of-publications/manual/item12848.pdf 3. For HT, are there any audit risks that you foresee with the Street relying on non-GAAP earnings to evaluate and make predictions about changes in stock price and HT separately reporting such earnings? 4. Review the non-GAAP adjustments listed for this company in Appendix B. Put yourself in the position of a company spokesperson. Explain a rationale that the company would communicate to the investment community that supports the use of these specific adjustments. Now put yourself in the position of the staff auditor (Q1 and Q2). Are there characteristics with some of these adjustments that were more important when finalizing this opinion? Note: for another example of a press release that describes a significant difference between GAAP and non-GAAP earnings, please see the link below for the press release from Salesforce.com: http://www.salesforce.com/companyews-press/press-releases/2012/02/ Issues in Accounting Education Volume 28, No. 1, 2013 Bierstaker, Monahan, and Peters 82 120223.jsp Although the company has a net loss per share (which might concern an auditor), an analyst might be excited about its revenue growth and positive non-GAAP earnings (with stock-based compensation being one of the major adjustments to GAAP earnings), leading to its $20 billion market capitalization. 5. Research two other company earnings releases and identify two additional non-GAAP adjustments that would be important in a going concern designation, and explain why they would be important. REFERENCES Curtis, A., S. McVay, and B. Whipple. 2012. Non-GAAP Earnings: Informative or Opportunistic? Working paper, The University of Utah. Hahn, W. 2011. The going-concern assumption: Its journey into GAAP. The CPA Journal 81 (2): 26-31. Kuruppu, N., F. Laswad, and P. Oyelere. 2003. The efficacy of liquidation and bankruptcy prediction models for assessing going concern. Managerial Auditing Journal 18 (6/7): 577-590. Louwers, T., R. Ramsey, D. Sinason, J. Strawser, and J. Thibodeau. 2011. Auditing and Assurance Services. 4th Edition. New York, NY: McGraw-Hill. Public Company Accounting Oversight Board (PCAOB). 2011. Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements. Available at: http://pcaobus. org/Rules/Rulemaking/Docket034/Concept_Release.pdf Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics APPENDIX A Financial Statements Issues in Accounting Education Volume 28, No. 1, 2013 83 84 Bierstaker, Monahan, and Peters Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics Issues in Accounting Education Volume 28, No. 1, 2013 85 Bierstaker, Monahan, and Peters 86 APPENDIX B HT 2011 Reconciliation of GAAP to Non-GAAP Earnings Preliminary Year Ended Sept. 30, 2011 Net income (loss) reconciliation: GAAP net loss (1) Purchase accounting adjustment (2) Amortization of intangible assets (3) Stock-based compensation (4) Restructuring and integration (5) Litigation provision ($41,062) 5,007 14,996 40,859 10,108 5,900 Non-GAAP net income $35,808 Notes Regarding the Above Adjustments (1) Purchase Accounting Adjustment: When an acquisition occurs in the software industry, GAAP requires the acquirer to record deferred revenue at cost. The above adjustment simply adds an additional amount of revenue that would have been recorded had the companies been stand-alone or combined for the entire period. (2) Amortization of Intangible Assets: In accordance with GAAP, HT amortizes intangible assets acquired in connection with acquisitions. HT excludes these amortization costs in non-GAAP financial measures. (3) Stock-Based Compensation: HT excludes stock-based compensation expense in our non-GAAP measures. Stockbased compensation includes stock options, stock granted to employees, and non-executive directors in our nonGAAP financial measures. (4) Restructuring and Integration: Restructuring costs or benefits related to lease abandonment accruals. These costs represent future cash flows associated with the abandonment of lease contracts. (5) Litigation Provision: In this case, the litigation provision was already accrued and, thus, recorded as an expense on the income statement. APPENDIX C Current Auditing Guidelines Dealing with a Going Concern (Supersedes Section 340) Source: SAS No. 59; SAS No. 64; SAS No. 77; SAS No. 96. See Section 9341 for interpretations of this section. Effective for audits of financial statements for periods beginning on or after January 1, 1989, unless otherwise indicated. .01 This section provides guidance to the auditor in conducting an audit of financial statements in accordance with generally accepted auditing standards with respect to evaluating whether there is substantial doubt about the entity's ability to continue as a going concern. fn1fn2 Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary. Ordinarily, information that significantly contradicts the going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions. Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics 87 THE AUDITOR'S RESPONSIBILITY .02 [The following paragraph is effective for audits of fiscal years beginning on or after December 15, 2010. See PCAOB Release No. 2010-004 (http://pcaobus.org/Rules/ Rulemaking/Docket%20026/Release_2010-004_Risk_Assessment.pdf ). For audits of fiscal years beginning before December 15, 2010 (see: http://pcaobus.org/Standards/ Auditing/Pages/AU341_02a.aspx).] The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time). The auditor's evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor's report. Information about such conditions or events is obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management's assertions embodied in the financial statements being audited, as described in Auditing Standard No. 15, Audit Evidence. .03 The auditor should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time in the following manner: a. The auditor considers whether the results of his procedures performed in planning, gathering evidential matter relative to the various audit objectives, and completing the audit identify conditions and events that, when considered in the aggregate, indicate there could be substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. It may be necessary to obtain additional information about such conditions and events, as well as the appropriate evidential matter to support information that mitigates the auditor's doubt. b. If the auditor believes there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, he should (1) obtain information about management's plans that are intended to mitigate the effect of such conditions or events, and (2) assess the likelihood that such plans can be effectively implemented. c. After the auditor has evaluated management's plans, he concludes whether he has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. If the auditor concludes there is substantial doubt, he should (1) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern for a reasonable period of time, and (2) include an explanatory paragraph (following the opinion paragraph) in his audit report to reflect his conclusion. If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure. .04 The auditor is not responsible for predicting future conditions or events. The fact that the entity may cease to exist as a going concern subsequent to receiving a report from the auditor that does not refer to substantial doubt, even within one year following the date of the financial statements, does not, in itself, indicate inadequate performance by the auditor. Accordingly, the absence of reference to substantial doubt in an auditor's report should not be viewed as providing assurance as to an entity's ability to continue as a going concern. Issues in Accounting Education Volume 28, No. 1, 2013 Bierstaker, Monahan, and Peters 88 CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Overview Authoritative accounting bodies (i.e., SEC, FASB) emphasize that non-GAAP financial measures should not be considered as a substitute for, or superior to, GAAP financial measures, which should be considered as the primary financial metrics for evaluating financial performance. The concern is that non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles, so comparability between companies may be problematic, because different companies may choose to exclude different items in inconsistent ways. Instead, they are based on subjective determinations by management designed to supplement GAAP financial measures. College accounting courses often emphasize that non-GAAP financial measures are subject to a number of important limitations, and should be considered only in conjunction with consolidated financial statements prepared in accordance with GAAP. Non-GAAP financial measures sometimes differ from GAAP measures with the same names, over time, and across companies. For example, a non-GAAP measure for one company may use the same name (i.e., nonGAAP earnings), but include different adjustments to calculate non-GAAP earnings when compared to other companies. Accordingly, investors (and auditors) should exercise caution when evaluating any non-GAAP financial measures. Despite these limitations, many firms believe that non-GAAP financial measures provide meaningful supplemental information about operating results, primarily because they exclude costs and expenses that are not indicative of the ongoing operating performance of the business. As such, eliminating non-cash and non-recurring items may be a useful exercise in the context of a going concern decision. Moreover, the PCAOB has recently proposed to include non-GAAP measures as part of an expansion to the auditor reporting model to potentially make it more informative (PCAOB 2011). However, concerns have also been expressed about whether these changes are really needed to update the audit report beyond the pass/fail model that has been used for 75 years, or will these changes just become incorporated as additional boilerplate language (Radin 2012). This case deals with a technology company that has had difficulty over its life generating GAAP earnings, and whether it is a going concern risk. Accounting students often struggle with the use of non-GAAP earnings in decision making; however, the marketplace is ONLY interested in using these figures to estimate future cash flows. Since GAAP does include some adjustments to operating income that will most likely not be repeated in the future, it is important for students to consider the implications of different adjustments to operating income. Related Cases This case focuses on going concern designations, but it has implications for broader use of operating cash flows in valuation exercises, as discussed below. Other case studies have asked students to make a going concern judgment in the context of a furniture retailer (Clikeman 2005) or a manufacturer (Jennings and Henry 2008), weigh the pros and cons of a going concern designation for a high-tech company (Eckstein et al. 1998), or examine the relationship between pro forma earnings (related to a business combination) and analysts' reports (Stuart and Karan 2003). However, our case is the first that we are aware of that links the components of non-GAAP earnings to the going concern judgment. Learning Objectives At the conclusion of the case, students should be able to: Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics \u0002 \u0002 \u0002 \u0002 \u0002 89 Explain and apply current auditing standards to the issue of going concern. Appreciate the differences between SEC (GAAP) reporting, and what companies may include in their press releases. Understand the many adjustments to GAAP earnings that companies use in their earnings releases. Understand the reasoning behind these non-GAAP adjustments, and when they are useful versus destructive to the goals of financial reporting. Provide examples of the different ways that companies respond to the Street in attempting to provide guidance on their future cash flows. Implementation Guidance The case can be used in either an Auditing or Intermediate Accounting class, depending on the primary focus of the instructor. It could also be used to focus on ratio analysis and valuation issues in various other courses. The case is self-contained, with the auditing pronouncements and financial statements included in the body of the case, so it can easily be covered in one class period. \u0002 Auditing Course: The case can be used to introduce the concept of Going Concern, which has received more attention lately due to the number of major firms that have gone bankrupt or been taken over due to a lack of liquidity. For example, you could point out that General Motors recently received a going concern warning after several years of operating losses and declining stock price (Louwers et al. 2011). In fact, students may enjoy viewing a video on an ABC news story on GM that is accessible at the following link: http://abcnews.go. com/video/playerIndex?id7018158, on General Motors' Going Concern. The differences between GAAP and non-GAAP earnings provide a good springboard for the discussion of why earnings are useful predictors of future cash flows and what limitations may exist to limit this usefulness. Having students evaluate real companies that received a going concern highlights the issues involved in this important and difficult decision by auditing firms. Auditing research, for example, shows that auditors only warn investors about 50 percent of the time before a company goes bankrupt, despite the availability of some sophisticated bankruptcy models (Kuruppu et al. 2003). This could lead to an interesting class discussion around why auditors only give a going concern warning about half of the time before a company goes bankrupt. You could ask your students why this is the case. Arnold et al. (2001) suggest that auditors may be susceptible to socio-political pressure not to give a going concern qualification, given the amount of uncertainty and lack of knowledge for making the judgment, and that insolvency specialists bring a different set of knowledge and approach to this judgment. Geiger and Raghunandan (2002) find that the number of going concern qualifications dropped over time, and attribute this to reduced litigation pressures on auditors from investors. In addition, International Financial Reporting Standards (IFRS) require companies to disclose material uncertainties that could potentially mislead investors and creditors into thinking the financial condition of the company is worse than it really is (Accountancy 2009). The case itself demonstrates that GAAP earnings can be impacted by a number of issues that may not impact a company's ability to meet cash flow requirements over a oneyear period. (See the Teaching Notes for a discussion of non-cash and non-recurring items that may not be relevant to the going concern decision, but would be included in GAAP earnings). This may lead to a good discussion of why a one-year period may, or may not, be an appropriate time period to evaluate a going concern. Recently, the FASB proposed to have management take responsibility for evaluating going concern risks over a one-year Issues in Accounting Education Volume 28, No. 1, 2013 Bierstaker, Monahan, and Peters 90 \u0002 \u0002 time period, but also suggested that a longer time period could also be appropriate (Hahn 2011). When evaluating qualitative factors related to the going concern judgment, students may focus on information in HT's preliminary 10-K, which indicates the strength of their competition, which includes many larger companies with more resources than HT. While these disclosures are required, it is important to recognize that these risks are often overstated to help avoid investor lawsuits charging that they were misled by the wording of these risks. However, these risks are significant and cause for concern. In addition, students may ask for information regarding management plans to deal with mitigating the conditions for a going concern; however, these plans would only be provided to satisfy auditor concerns. In this case, the large cash position, strong operating cash flows, and lack of debt make a going concern unwarranted. Intermediate Accounting Course: Students continue to be perplexed over the differences between GAAP earnings and cash flows. The Statement of Cash Flows continues to be a major stumbling block to students' understanding of accounting, in part because the indirect method is a popular choice for preparers, but difficult to interpret for financial statement users. This case highlights many of the differences between GAAP earnings and cash flows that will (most likely) be repeated in the future. The situation faced by this young auditor indirectly addresses understanding the various components of operating income through the discussion of a going concern issue. This reinforces the connection between accounting and finance issues, particularly in valuing a firm. Instructors can easily use this case to extend the discussion around the many uses of operating income in making business decisions. For example, stock compensation is a major component in the difference between HT's GAAP and non-GAAP earnings. Although this difference may affect the long-term valuation of HT, it will not lead to a short-term impact on cash flows that would reduce its liquidity. Ratio Analysis and Valuation: This case can be used to illustrate the value of ratio analysis for a variety of purposes. For example, liquidity (current and quick) ratios would be relevant from a going concern perspective. Where students may indicate debt ratios as being important in a going concern judgment, coverage ratios may be more relevant due to the one-year time element of a going concern designation. In addition, profitability ratios would be more relevant from a valuation or investor perspective. The importance of benchmarks should be stressed by the instructor in order to make the ratio analysis portion of the case meaningful. Students could be asked to find relevant industry ratios for hightech companies, or look up financial statements of competitors of similar size (e.g., Concur, or possibly SalesForce.com). Students can complete this assignment individually or in groups. In our pilot test, we had students address the case individually and provide written responses to the case questions. Learning Validation To assess the effectiveness of the case study in achieving the previously stated learning objectives, 56 students were given a survey after completing the case. Students responded to a series of eight statements on a Likert scale from 1 (disagree) to 7 (agree), with 4 being neutral. The first statement was ''I learned a lot about the going concern issues on an audit engagement.'' Students' mean (standard deviation) response to this statement was 5.36 (0.90). The second statement was ''I learned a lot about auditing standards related to going concern judgments.'' Students' mean (standard deviation) response to this statement was 5.31 (0.86). The third statement was ''I learned a lot about SEC reporting and what companies may include in their press releases.'' Students' mean (standard deviation) response to this statement was 4.64 (1.26). The fourth Issues in Accounting Education Volume 28, No. 1, 2013 Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics 91 statement was ''I learned a lot about the many adjustments to GAAP earnings that companies use in their earnings releases.'' Students' mean (standard deviation) response to this statement was 5.75 (0.90). The fifth statement was ''I understand when non-GAAP adjustments are useful versus destructive to the goals of financial reporting.'' Students' mean (standard deviation) response to this statement was 5.89 (0.87). The sixth statement was ''I learned how companies provide guidance to investors regarding their future cash flows.'' Students' mean (standard deviation) response to this statement was 5.27 (0.92). The seventh statement was ''I learned how to use ratios to identify going concern issues.'' Students' mean (standard deviation) response to this statement was 5.54 (1.24). The eighth and final statement was ''My analytical skills improved.'' Students' mean (standard deviation) response to this statement was 5.30 (1.06). Overall, these results indicate that the learning objectives of the case study were achieved. However, there was some variance in the results. The means were the highest for adjustments to GAAP earningson-GAAP adjustments, a central focus of the case. Means were relatively high for going concern judgments, but there was some variance regarding the use of ratios and improvement in analytical skills. The written comments of students suggest that some of them wanted more guidance on what ratios they should use, although research on this issue was intended to be part of the requirements of the case. The lowest mean was for learning about SEC reporting and press releases, and this also had a relatively high standard deviation. Again, the written comments of students indicated that some of them would have liked more guidance on this, although it was a required research component of the case. Consistent with the reported means, most student comments on the case were positive. Some debated the merits of assigning the case as a group versus an individual assignment and, as noted previously, some students would have preferred more guidance on SEC filings and going concern metrics. TEACHING NOTES Teaching Notes are available only to full-member subscribers to Issues in Accounting Education through the American Accounting Association's electronic publications system at http:// aaapubs.org/. Full-member subscribers should use their usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. Please do not make the Teaching Notes available to students or post them on websites. If you are a full member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters office at info@ aaahq.org or (941) 921-7747. REFERENCES Accountancy. 2009. Don't panic. 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The CPA Journal 82 (1): 11-14. Stuart, I., and V. Karan. 2003. eToys, Inc.: A case examining pro forma financial reports, analysts' forecasts, and going concern disclosures. Issues in Accounting Education 18 (2): 191-209. Issues in Accounting Education Volume 28, No. 1, 2013