Practitioner Economists and Business Men

¶ … practitioner economists and business men with a wide series of advice on how to succeed at their professional endeavors. They tell them how to organize their internal processes, how to treat and attract customers or how to motivate and retain staff members. It also teaches them how to identify those business partners, such as customers or purveyors, which are more likely to succeed in their own business efforts and as such sustain mutually fruitful long-term relationships. The aim of this paper is to present the concept of a going concern, provide examples and offer pointers on how going concerns could be identified.

Definition and Explanation of Going Concerns

The specialized literature presents the reader with a multitude of definitions for the concept of the going concern. Despite the different formulation however, the substance of the message sent is generally the same. John Tracy (2008) offers one of the most relevant and easy to understand definitions. He argues that "a going concern is a business that has sufficient financial wherewithal and momentum to continue its normal operations into the foreseeable future and would be able to absorb a bad turn of events without having to default on its liabilities." Tracy goes on explaining that a going concern is not faced with the immediate threat of a financial crisis and neither is it pressed with a financial emergency. It is however possible that some limited financial threat exists, but that their importance is minimal, and as such the company is perceived as going concern.

3. Examples and Identification of a Going Concern

The first and foremost important means by which a going concern can be identified is that of looking at the respective company's assets and financial results. This is a highly useful approach as it indicates whether or not the company possesses sufficient resources in order to sustain operations for the time coming. The most pivotal element of assessing the stability of the company in the immediate future is the analysis of its financial health. This includes the investigation of all financial statements, such as the cash flow statement, the balance sheet or the income statement. The investigator will look at entries such as shareholders' equity, bank loans or account receivables and will compare them against the net profits declared by the organization. Had such an analysis been conducted at Enron, chances are the auditor had noticed that the institution was far from being a going concern. When such a detailed audit was conducted at WorldCom, the truth came out about the company's fraudulent actions.

But the review of financial statements only represents the primary level of the necessary analysis. A continuation is however necessary and refers to the computation of numerous financial ratios. For instance, one could measure the quick and current ratios, which reveal the company's ability to pay its short-term debt. Other useful ratios include EPS (earnings per share), EBITD (earnings before interest, taxes and depreciation), the debt to equity ratio, the gross margin, the return on assets, the inventory turnover and so on. Yet, for the analysis of the financial ratios to uphold the highest levels of relevance, it is crucial to compare the results against the industry averages. The Reuters website constitutes a highly useful source in this sense. Looking at the financial ratios of sports shoes and apparel manufacturer Nike, one can easily observe their net superiority in comparison to industry averages (Reuters, 2009). This translates into the classification of Nike Inc. As a going concern.

Then, there is the analysis of the macro-environment in which the company operates. It is useful to look at the general state of the economy and assess how this could impact the entity of interest. The general theory is that "in the absence of evidence to the contrary, […] the business will continue to trade in the normal way into the foreseeable future. This enables the account to assume that stock will eventually be sold, that fixed assets will continue to be used, and so on" (Alexander and Britton, 2004).

A relevant example for this scenario is given by the situation encountered throughout the past two years within the American automobile industry. The market was on the one hand characterized by a growing customer focus on small size vehicles incorporating fuel efficient engines. This situation occurred due to the impending occurrence of a global crisis and the scarcity of natural resources. At an industry level, the Japanese manufacturers were able to foresee these needs and serve them, even within the United States. The national producers however, were not able to do so. If one had looked at the macro-environment in which Ford operated, they could have come to the realization that the American automobile manufacturer was far from being a going concern.

In terms of a gradual and succinct presentation of the measures which have to be undertaken in order to identify the existence of a going concern, the auditor has to engage in the following actions:

identify and analyze any existent or potential risks which could influence organizational operations and results get rapid access to all financial statements and other organizational documents remain objective and detached in order to most effectively and efficiently assess organizational documents engage in open communications with the managerial team and accurately review their input assess the future of the company as it is presented and estimated by the managerial team in some cases, the internal auditors of the assessed company have already conducted analyses and identified the determinants of going concerns; it is crucial to assess these reports as well pay attention to all forces indicative of going concerns or risks, such as financial difficulties, operating troubles (high employee turnover rates, lack of adequate technologies etc.), failure of compliance with statutory requirements and so on (the Institute of Certified Public Accountants in Ireland)