It is a basic theory in accounting that a business should be considered a going concern which means the business will be in operation usually over the next 12 months. If a business is a Going Concern the business has little risk of liquidating or ceasing operations in the foreseeable future. Financial statements are prepared with this theory as the premise.
A Going Concern opinion is one of the most difficult opinions a CPA needs to render. A Going Concern Opinion is rendered by a CPA when it is the opinion of the CPA that the company is no longer a going concern and that there is considerable risk that the company will not be in business by the end of the next fiscal year. Material uncertainties must exist to lead the CPA to this opinion. These opinions are difficult to render because it is not good news for management, the company’s lenders, the company’s suppliers and creditors. Based on all of this dissatisfaction the CPA has to have as much evidence as possible to support this opinion. If the CPA does not issue a going concern opinion and the business liquidates or ceases operations within the fiscal year, the CPA will be at tremendous risk. The material uncertainty that exists could be something that is more evident like the strong likelihood of an unfavorable ruling on a lawsuit, or the strong likelihood of an unfavorable geo-political event.
Would CPA’s have less risk if they had access to financial modeling tools that can forecast with great accuracy based on a solid set of reasonable assumptions the future cash position of a company at different levels of sales volumes and expense levels when rendering going concern opinions? I think so. It not only reduces risk for the CPA, but provides a more solid basis for explaining to the client why a going concern opinion is being rendered.
Currently most CPA’s use metrics and similar indicators to help render their opinion. If financial modeling tools were available at a reasonable cost that identified with great accuracy the forecasted cash position, inventory position and liability position of the company at selected volumes of sales, selected levels of expenses, and selected levels of inventory in confluence with a solid set of reasonable assumptions I believe that would give the CPA greater confidence and more solid footing in rendering this difficult opinion.
Next Step CFO has such a financial modeling tool and it is called cashtell.