No requirement to be a fortune teller on the part of the auditors. Unfortunately. that's the erroneous conclusion that Ms McKenna would lead you to through her post. You cannot, as Ms. McKenna is prone to do, look at last year's financial statements of a company that has gone under and say "hey, look, this company went under less than a year after getting a clean opinion, therefore, the auditors' going concern assessment MUST HAVE been wrong". That is Monday morning quarterbacking, using 20-20 hindsight, whatever phrase you prefer. Anyone can sit around after the proverbial S$&! has hit the fan and point fingers saying "you were wrong, you were wrong, and you were wrong"

The proper way to assess it is to say "was information available to the auditor, when they signed their opinion, that would have led a REASONABLE PERSON to say that there was SUBSTANTIAL DOUBT as to whether that company would survive another 12 months?".

The distinction appears subtle, but really it's a very big distinction. One view is saying "What happens after you sign your opinion proves you were right or wrong". The other says "Did you make a reasonable decision given what you knew at that time?" The accounting standards and literature point you to the 2nd view, Ms McKenna and others point you to the 1st view.

“The auditor has a responsibility to evaluate whether there is a substantial doubt about the company’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. 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.”

The timing matter creates all sorts of problems – not least is the apparent requirement to be a crystal ball gazer – at the time of signing the report.

A going concern opinion for any of the large instititions with that much risk and paper accounting would likely have brought the entire industry down earlier – and to your point maybe this is what should have happened? But which accounting firm is going to single out a specific client based on the same systemic risks that affect everyone else? It would have to be an all or nothing approach – not something any one firm could accomplish alone. This is supposedly why we have regulators, not auditors.

–JR

The clear forseeability of the crisis faced by these major institutions is my personal opinion. My support for this contention is the found in the substance of numerous blog posts about all of the major players and about the subprime issues very early in the game. Some were writing even earlier about the housing bubble and its potential impact on the economy and on banks and others that were heavily exposed.

Look at any of my posts regarding Fannie Mae, Freddie Mac, AIG, Lehman, GM, GE/GMAC, and the mortgage lenders like New Century, Countrywide, Beezer and the ratings agencies. They started in early 2007. If I knew, surely those in the trenches certifying the books knew that a whole industry was at substantial risk?

One of the first mentions of the lack of “going concern ” opinions in the blog was in a link to an article by Jonathan Weil re Deloitte and American Home Mortgage in August of 2007. I’m not alone here in my opinion that Big 4 are reluctant to kill the geese laying golden eggs for them like Bear Stearns and Lehman until pushed to the brink. It’s why the PCAOB had to remind them of it.
http://www.retheauditors.com/2007/08/bloombergs-jonathan-weil-is-on-roll.html

I’m hoping you will post your support for these statements. Perhaps you could point us to a single article projecting the failure of the banking system that was published prior to March of 2008, when all the banks would have issued their 10-Ks by? It’s difficult for me to jump to the conclusion that the auditors “should have known” there was substantial doubt as to the ability of these long-lived institutions to survive the upcoming year. I’m hoping you can point to someone who, at the time the auditors were making their assessment, had, in fact, reached the conclusion that the failure of these banks was imminent.

I do note that the link you provided to your own February 2008 blog post did not mention going concern, nor did any of the related posts.

“Sorry, Mike. I think your clients will need a stronger argument in their defense, given the fact that December 31, 2008 financial statements had no “going concern” qualifications and the worst of the crisis was soon to come.”

I don’t follow your argument, since no company, to my knowledge, has issued their 12/31/08 FS, considering that was four days ago.