Going Concern Opinions: A Rarely Used Tool
In the years leading up to the financial crisis, the business press
highlighted several significant risks emerging from the credit markets
that would impact the financial statements of investment banks,
commercial banks, mortgage companies and insurance companies. These
risks included inflated debt ratings from the rating agencies,[1] what
the press referred to as "sloppy" documentation and recordkeeping
practices for derivative contract agreements,[2] and the erosion in
lending practices. [3] As the financial crisis unfolded, many of these
risks forced several public companies to file for bankruptcy or seek
government assistance. These risks should arguably have been apparent
to public company auditors. Yet, the one real tool at the auditors'
disposal — a going concern opinion — was rarely used.
Out of the ten largest bankruptcies during the financial crisis, only
two had going concern opinions. During the year leading up to their
bankruptcy filings, the market capitalization of the eight companies
without going concern opinions declined from a collective $75.5
billion in the year prior to their respective bankruptcy filings to a
collective market capitalization of just under $700 million at the
time of their filing — a 99% loss in investor value. In addition to
the $75 billion decline in equity market capitalization, fixed income
investors faced even greater losses, potentially amounting to over
$200 billion in public debt issued by these eight companies prior to
their bankruptcy filings.[4]
Furthermore, none of the top ten institutions receiving Troubled Asset
Relief Program (TARP) funds received going concern opinions before
accepting a combined $295 billion from the government. The aggregate
market capitalization for these ten TARP recipients declined by $211
billion,[5] and the losses most likely would have been greater if
these companies had not received government assistance.
There also were no going concern opinions for the major institutions
that eventually were forced into mergers that resulted in significant
losses to their investors.
In the years leading up to the financial crisis, the business press
highlighted several significant risks emerging from the credit markets
that would impact the financial statements of investment banks,
commercial banks, mortgage companies and insurance companies. These
risks included inflated debt ratings from the rating agencies,[1] what
the press referred to as "sloppy" documentation and recordkeeping
practices for derivative contract agreements,[2] and the erosion in
lending practices. [3] As the financial crisis unfolded, many of these
risks forced several public companies to file for bankruptcy or seek
government assistance. These risks should arguably have been apparent
to public company auditors. Yet, the one real tool at the auditors'
disposal — a going concern opinion — was rarely used.
Out of the ten largest bankruptcies during the financial crisis, only
two had going concern opinions. During the year leading up to their
bankruptcy filings, the market capitalization of the eight companies
without going concern opinions declined from a collective $75.5
billion in the year prior to their respective bankruptcy filings to a
collective market capitalization of just under $700 million at the
time of their filing — a 99% loss in investor value. In addition to
the $75 billion decline in equity market capitalization, fixed income
investors faced even greater losses, potentially amounting to over
$200 billion in public debt issued by these eight companies prior to
their bankruptcy filings.[4]
Furthermore, none of the top ten institutions receiving Troubled Asset
Relief Program (TARP) funds received going concern opinions before
accepting a combined $295 billion from the government. The aggregate
market capitalization for these ten TARP recipients declined by $211
billion,[5] and the losses most likely would have been greater if
these companies had not received government assistance.
There also were no going concern opinions for the major institutions
that eventually were forced into mergers that resulted in significant
losses to their investors.
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