Dr. Hadass Gelander, Prof. Yoram Eden, Prof. Dan Elnathan<\/p>\n
The Going Concern (GC) assumption is one of the fundamental assumptions in accounting, and lies at the heart of
\nfinancial reporting and financial statements. It means that the entity will continue to exist and conduct normal operations
\nwithin the near future, and the lack of evidence to the contrary. Inclusion of GC enthuses in the auditors\u2019 opinion points to
\nsignificant doubts as to the ability of the entity to continue its normal course of business, and intended as a warning to the
\nreaders of the financial statements.
\nThe GC enthuses may have serious implications for the entity, and raises doubts with suppliers, customers, employees and
\ncreditors as to the ability of the entity to continue and meet its obligations to these parties. Oftentimes it will trigger debt
\ncovenants and induce creditors to demand full and immediate repayment of loans the entity took. It can also lead to
\nreduced credit rating of the entity by rating agency. Finally, it can serve as significant evidence in court when it comes to
\ndetermine whether the entity is insolvent. In lieu of the GC enthuses, the auditor may consider the inclusion of an
\n"Emphasis of matter paragraph. It points to certain notes that highlight financial difficulties the entity faces, but does
\nnot use the term \u201cgoing concern\u201d which has legal and financial implications.
\nIn this paper, we investigate the following research assumptions:
\nA1: The GC enthuses is included in the financial statements TOO LATE, and close to a financial crisis. A2: Oftentimes,
\nthe \u201cEmphasis of matter paragraph" in the auditors\u2019 opinion is serving the role, which the GC enthuses was supposed to
\nplay.
\nA3: The entity\u2019s auditor may have an incentive to delay the GC enthuses.
\nA4: Using available financial information and simple ratio analysis would have revealed the financial crisis prior to the
\ndisclosure of the \u201cEmphasis of matter paragraph\u201d and the GC enthuses.
\nOur findings indicate that, in regards to A1, companies delay the GC enthuses, and on average make it public only 2
\nquarters prior to a financial crisis, which is too late by accounting standards. As for A2, we find that for the majority
\n)93%) of sampled entities, the \u201cEmphasis of matter paragraph\u201d preceded the GC enthuses by 3-4 quarters.
\nWe find support for A3 in a significant negative correlation between the auditors\u2019 fees and the number of quarters that
\npassed between the GC enthuses and the financial crisis that ensued. We also find, in support of A4, that the financial
\ncrisis could have been detected using simple financial ratios\u2019 analysis a year prior to the issuance of the \u201cEmphasis of
\nmatter paragraph\u201d and more than a year prior to the GC enthuses.<\/p>\n","protected":false},"excerpt":{"rendered":"
The Going Concern (GC) assumption is one of the fundamental assumptions in accounting, and lies at the heart of
\nfinancial reporting and financial statements<\/p>\n","protected":false},"author":1,"featured_media":198,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-187","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news"],"acf":[],"yoast_head":"\n