The possibility of a requirement for management to make a going concern call is back on the table after the Financial Accounting Standards Board decided this week to take a new look at the idea.
The question of whether and how management should be required to make a definitive assertion that it has doubt about an entity's ability to stay in business has ebbed and flowed through various FASB projects over the past few years. The Public Company Accounting Oversight Board has discussed whether to update the standards for auditors, and that has raised tough, fundamental questions for auditors, preparers, and regulators alike about who should make the call that a company's future is in doubt.
The idea of requiring a management assertion appeared to die recently when FASB decided it would not require qualitative disclosures along with some new quantitative disclosures that are being developed about an entity's risk related to liquidity and interest rates. Now it appears the board will open a new project to consider the question all over again, separate from any other standards it may be developing. Board members have wrestled hard with the question of whether it's feasible to write a rule that would compel management to make such an assertion.
“My views have not changed,” said FASB Chairman Leslie Seidman during a FASB meeting to reopen the debate. “The better approach is for us to prescribe a stable set of disclosures that would reveal naturally any negative trending with respect to liquidity. I struggle with the identity of a specific threshold where management would then start to discuss something that I personally this is already required in (management discussion and analysis).”
The majority of FASB members believe there may be more to require, however, and they want to pursue a fresh look at whether they can write a rule to require management to make a more definitive disclosure that an entity is in trouble. “I still think there is more for management to say,” said FASB member Larry Smith. He advocates working with the PCAOB to develop coordinated rules that would establish appropriate requirements for management to make an assertion and for auditors to audit the assertion. “I personally think it would be worthwhile for us to continue to pursue whether management should be making those disclosures.”
FASB member Tom Linsmeier agreed that it's a difficult requirement to put on management, but that auditors shouldn't be left to make the determination on their own, apart from management. “Auditors are going to have a hard time forcing management to make the disclosure if we're not going to require it ourselves,” he said. “It's management that understands this” and can best explain it to investors.
The board directed the staff to prepare a new package of materials for its consideration at a future meeting to determine how they can proceed.