Public companies receiving going concern audit opinions during fiscal year 2020 were at the lowest number (1,261) and percentage (17.9 percent) for all years between 2000 and 2020, according to a new report from Audit Analytics.
The number of going concern opinions in 2020 went down 11.4 percent from 2019, despite an increase in the total number of audit opinions in annual reports for the first time since 2007. In 2019, there were 1,423 companies (20.8 percent) that received going concern opinions.
Management and auditors are required by accounting and auditing standards to assess and report whether there are events or conditions that raise substantial doubt about a company’s ability to continue as a going concern within one year after the date its financial statements are issued or available to be issued. The economic uncertainties caused by the pandemic created new risks to operations and cash flows, and management needed to adapt and identify new mitigation plans to alleviate any going concern issues.
“We believe the low rates of going concern opinions were due primarily to government stimulus and easier access to capital,” said Derryck Coleman, director of research analytics at Audit Analytics and primary author of the report. “Improvements were driven by companies that ordinarily have higher rates of going concern opinions: small companies and companies with recurring losses. These populations are generally dependent on raising capital to fund their operations.
“This conclusion is supported by the 17.3 percent improvement among companies that raised capital between 2019 and 2020 and the 11.5 percent decline in going concern opinions that cite recurring losses.”
Going concern issues
Recurring losses was the most commonly disclosed going concern issue in 2020, as in all 21 years of Audit Analytics’ research, at 71.8 percent.
Cash constraints was the second most noted issue in 2020 reports at 35.7 percent, followed by the related category of cash flow issues at 25.7 percent.
For 2020, other top going concern issues included having no or limited operations (21 percent), needing additional funding (14.1 percent), and debt defaults and bankruptcies (8.9 percent).
Results by type and location of company
The number of U.S. companies receiving a going concern opinion fell below 1,000 for the first time in 2020. The figure (942) represented 16.6 percent of all annual report opinions issued, down from 19.4 percent in 2019.
Foreign company going concern opinions also fell in 2020, to 23.8 percent of all annual report opinions issued from 27 percent in 2019.
There was an 18.6 percent improvement in the number of companies that received a going concern opinion in 2019 but a clean opinion in 2020, representing the greatest percentage improvement over the record of this study and the highest number of companies since 2006.
Prior to 2020, the majority of declines noted in going concern reporting was attributed to companies that stopped issuing annual reports with audit opinions. However, during 2020, the survey attributed 56 percent of going concern opinion attrition to companies receiving clean audit opinions.
The number of companies that received going concern opinions in their first annual report issued increased from 2019 to 2020. The figure represented 12.1 percent of 2020 going concern opinions, the highest proportion since 2015.