The PCAOB should expand the requirements for auditors regarding going concern as-sumption and define them, so the auditors can improve their performance and gain back the trust of public. The focus of the paper is to show that current requirements prove to be insufficient for auditors for making correct assumptions. Unable to detect bankruptcies on time, lack of training to predict future and overconfidence of auditors hinders them in making accurate assumption about going concern reporting. The paper provides evidence for each hindrance followed by sug-gestions for improvement. It concludes with an alternative approach addressing the issues if management makes going concern assumptions as well as mentions conditions worsening due to regulations being eliminated.
AUDITOR’S CURRENT RESPONSIBILITIES
The auditing standards explain that during the course of an audit, auditors perform a lot of different tests to uncover misstatements. The auditors look for any information in the reporting process that could possibly affect the company’s operations within the next year (AU 341.01). With the help of tests, the auditors can assess whether the company will continue to operate. Auditors are not responsible for performing tests specifically for the purpose of finding evidence regarding going concern; however, they are responsible for disclosing any evidence or information they come across during the audit. Auditors communicate all evaluations to the management and the Audit Committee at the end of the audit.
INSUFFICIENT CURRENT REQUIREMENTS
Considering the above mentioned auditor’s responsibilities, they seem vague. Current requirements are not sufficient to gain back the trust of public. The bankruptcies prove that the auditors’ current requirements are not fulfilling the users’ demands because statistics show, “All 12 companies received an unqualified opinion on their most recent financial statements filed prior to bankruptcy filing” (Venuti, 2004). The author shows that the audits do not provide the public with correct information. While investors of Blockbuster were prepared after receiving SEC’s notice, investors from other companies including Kodak and Lehman Brothers were not ready for downfall.
Detecting Bankruptcy on Time
Before declaring bankruptcy, SEC filings of Kodak’s 2011 financial statements mentioned “substantial doubt” about its ability to continue to operate successfully (Edgar). Kodak’s management saw patterns and factors that imposed possible risks for the company. Even after all the losses and struggles, auditors did not think Kodak’s stability was in danger because it had strategic plans to face challenges and make profits. Based on auditor’s judgment, Kodak’s plans for progress seemed reasonable and possible for the coming year. However, auditors did not assess the sufficiency of those plans by check whether they would work for Kodak. The investors suffered as Kodak’s declining condition wasn’t given importance....