Going-Concern Warning
AdvancedA going-concern warning is a statement, made by management or by the auditor, that there is significant doubt about a company's ability to continue operating for the foreseeable future, usually at least the next twelve months.
Financial statements are normally prepared on the assumption that a company will continue in business. When events or conditions cast significant doubt on this, such as heavy losses, debts due that cannot be refinanced, breached loan covenants or loss of a major customer, management must disclose the uncertainty.
Auditors assess whether management's going-concern assessment is reasonable. If significant doubt exists and is properly disclosed, the auditor's report includes a section highlighting a material uncertainty related to going concern. This is often described as a going-concern warning.
For example, a retailer with falling sales and a large loan due in six months, with no agreed refinancing, might include a note explaining the uncertainty, and its auditor would draw attention to it.
A going-concern warning is a serious signal, but not a prediction of failure. Some companies recover through refinancing, asset sales or new investment. Others fail. The warning can itself make suppliers and lenders more cautious, adding to the pressure on the company.
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