Analyzing the Auditor’s Statement: The Going Concern Clause
Securities regulations require the company’s auditors to provide a report stating whether investors can rely on the information presented. Such reports can take several forms:
- Unqualified opinion
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
- Going concern clause
The final type of auditor’s statement reflects the “going concern” clause. Accounting standards work under the assumption that the company will remain in business. If there is doubt that the company can remain in business the financial statements might not accurately reflect the company’s prospects even if they adhere to accounting standards. In this case, the auditor will append a “going concern” clause to the statement, similar to the one found in the10KSB for LABURNUM VENTURES INC:
The accompanying financial statements referred to above have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the financial statements, the company is in the pre-exploration stage, and has no established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors, along with other matters as set forth in Note 1, raise substantial doubt that the company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Needless to say, investors should be particularly cautious when evaluating a company for which the auditor has included a “going concern” clause.
For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis, Securities Regulation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
