Issues on Going Concern Uncertainty for an Entity that Exhibits Future Collapse

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Recommended: Professionalism, ethics, and morals

So, Why Hide the Truth?

Two ethical dilemmas where the auditor may fail to report correctly and their respective consequences and motives are as follows (George E. Nogler 2008):

• Scenario 1: Not declaring going concern uncertainty for an entity that exhibits signs of future collapse in financial reports

- One motivator for this scenario is the company’s fear of being sued by its creditors; since going concern uncertainty directly implies not being able to repay debts to creditors in a timely manner. The ethical breach is concealing failure to avoid rightful legal action by creditors.
- Since one of an accountant’s basic duties is to report the financial standing of a company whether it was doing well or not; refraining from producing a report that exposes the company in a negative light is considered not fulfilling the job responsibilities of being an accountant which is ethically unsound.

• Scenario 2: Declaring going concern uncertainty for a company that exhibits healthy financial reports.

- An auditor is likely to issue a going concern opinion in order to protect himself/herself and strengthen their defensive position should the client company become bankrupt in the future and file a lawsuit against the auditor. The ethical issue here is the auditing party disregarding the client’s image in favor of its own possible legal protection.
- Declaring going concern uncertainty for a company that exhibits healthy financial reports is likely to result in the auditing firm losing this company as a client, but is justifiable by the explanation in the abovementioned point.

Both scenarios above would lead to the auditing firm losing its credibility as a third party in the eyes of stakeholders for failure of correct and hones...

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...at a key method to maintaining a culture of ethics in accounting and in financial decision making within the organization is keeping all accounting staff, auditing staff, CFOs, and financial controllers aware as well as alert at all times towards ethical issues relating to financial information that they have access to managing and producing. This is possible through the establishment of organizational codes of ethics, and creating a general environment of honesty and integrity displayed by top management leading their companies by example of strong ethical standards and good citizenship.

Shaub, M, Collins, F, Holzmann, O, & Lowensohn, S (2005) recommend hiring and promoting individuals with a high sense of ethics that match the company’s ethical conduct standards. In addition, they recommend rewarding employees who show high ethics and punishing those who do not.

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