The Association of Banks in Israel

The Concern Disclosure – Too Early or Too Late

Dr. Hadass Gelander, Prof. Yoram Eden, Prof. Dan Elnathan

The Going Concern (GC) assumption is one of the fundamental assumptions in accounting, and lies at the heart of
financial reporting and financial statements. It means that the entity will continue to exist and conduct normal operations
within the near future, and the lack of evidence to the contrary. Inclusion of GC enthuses in the auditors’ opinion points to
significant doubts as to the ability of the entity to continue its normal course of business, and intended as a warning to the
readers of the financial statements.
The GC enthuses may have serious implications for the entity, and raises doubts with suppliers, customers, employees and
creditors as to the ability of the entity to continue and meet its obligations to these parties. Oftentimes it will trigger debt
covenants and induce creditors to demand full and immediate repayment of loans the entity took. It can also lead to
reduced credit rating of the entity by rating agency. Finally, it can serve as significant evidence in court when it comes to
determine whether the entity is insolvent. In lieu of the GC enthuses, the auditor may consider the inclusion of an
"Emphasis of matter paragraph. It points to certain notes that highlight financial difficulties the entity faces, but does
not use the term “going concern” which has legal and financial implications.
In this paper, we investigate the following research assumptions:
A1: The GC enthuses is included in the financial statements TOO LATE, and close to a financial crisis. A2: Oftentimes,
the “Emphasis of matter paragraph" in the auditors’ opinion is serving the role, which the GC enthuses was supposed to
A3: The entity’s auditor may have an incentive to delay the GC enthuses.
A4: Using available financial information and simple ratio analysis would have revealed the financial crisis prior to the
disclosure of the “Emphasis of matter paragraph” and the GC enthuses.
Our findings indicate that, in regards to A1, companies delay the GC enthuses, and on average make it public only 2
quarters prior to a financial crisis, which is too late by accounting standards. As for A2, we find that for the majority
)93%) of sampled entities, the “Emphasis of matter paragraph” preceded the GC enthuses by 3-4 quarters.
We find support for A3 in a significant negative correlation between the auditors’ fees and the number of quarters that
passed between the GC enthuses and the financial crisis that ensued. We also find, in support of A4, that the financial
crisis could have been detected using simple financial ratios’ analysis a year prior to the issuance of the “Emphasis of
matter paragraph” and more than a year prior to the GC enthuses.