Determining a Bank’s Going Concern – a New Management Responsibility? By: Tim James, CPA Date: 1/21/2010 Banks are starting to have an increased risk of having a going concern report issued due to the current economic conditions. It is currently the auditor’s responsibility to determine if a bank should disclose in its financial statements the bank’s ability to continue as a going concern. The auditor makes an assessment of the bank’s ability to continue as a going concern based on various factors including, negative trends, indications of possible financial difficulties, internal matters, external matters and compliance with any regulatory agreements. The time frame for the assessment as defined by accounting standards is a reasonable period of time not to exceed one year beyond the date of the financial statement report.  If the auditors believe there may be substantial doubt, they should consider management’s plans to determine whether, if successfully implemented, they would mitigate the circumstances involving the doubt. If the auditors conclude that there is in fact substantial doubt that the bank will continue as a going concern, they should change the audit report to include an explanatory paragraph describing the reasons for the determination. The report would reference the note(s) in the financial statements where the reasons would be discussed more in detail.  The Financial Account Standards Board (FASB) issued an exposure draft “Going Concern” and, while it is not yet finalized, it is expected to be issued in the near future. As part of the changes, the new accounting standard will impose on management the responsibility for evaluating the bank’s ability to continue as a going concern. This is not currently part of the standard. The new accounting standard changes the time frame for which the evaluation will be performed to “at least, but not limited to, 12 months” from the end of the reporting period. This is different than the current standard that limits the time frame to 12 months from the date of the financial statements.  The proposed accounting standard also requires new disclosures when the entity’s financial statements are not prepared on a going concern basis. The new changes would also require management to disclose that fact and the reason why the entity is not considered to be a going concern in the financial statements. Management will need to consider several factors including, current and expected profitability, ability to raise new capital and compliance with any potential regulatory agreements. Once the management team has considered the information in aggregate and believes that there is substantial doubt that the bank will continue as a going concern, then it will have to consider plans or alternatives for dealing with the negative conditions and whether or not they have plans that can be effectively implemented for the bank to continue as a going concern.