Auditors' Responsibility - Disclosure of Corporate Collapse

Recent collapse of well-established business organizations around the world has intimidated the public investors to introduce new capital flows to the markets while some lose their investments. This chain of continuous corporate collapses had finally led to a global recession, threatening Sri Lankan companies to strive for their survival. Nowadays, the cost of bankruptcy of a single corporate has a fatal repercussion over the individual investors, other organizations and economy as a whole than in the past. Therefore, a mechanism of revealing the going concern ability of an organization prior to its collapse could avoid may pitfalls.


The limited access to the internal information of an organization, has increased the dependence on readily available published financial statements for the decision making purposes by the stakeholders. Accordingly, a considerable reliance is made on the independence auditor’s report for the truth and fair presentation of financial statements. In this regard the auditors' ability to warn the investing public of the financial distress and impending failure by way of a modification of the audit report has a great impact on the economic decisions of such investors.

Questioning the independence of auditors of the going concern evaluation of its client had not itself resolved since the Enron-Andersen scandal. Recent unprofessional conduct of corporate governance and auditors’ independence caused number of financial institutions and conglomerates to wind up or restructure at a loss of the investor reliance on independence auditor’s report.

Moreover, there is also evidence that the going concern decision involves economic tradeoffs of the risks of losing a substantial client and of loss of reputation. In addition to the aforementioned matter the auditor faces a dilemma when disclosing the qualification on the audit report. If a financially distressed corporate collapse subsequent to an unqualified opinion, the auditor is at a risk of being charged as guilt of nondisclosure of the fact.

On the other hand if the report is modified as to the validity of going concern assumption, it could hasten bankruptcy. Therefore the auditor must be skeptic of the work he performs.

Financial statements are prepared with the basic fundamental assumptions of accrual basis and going concern. Accordingly, with going concern assumption, assets and liabilities are recorded on the basis that the entity is able to realize its assets and discharge its liabilities in the normal course of the business. If the going-concern assumption fails, then the amount and classification of assets and liabilities in the balance sheet may need to be adjusted. Among other things, the going-concern assumption justifies the current and noncurrent classification within the balance sheet, the allocation of costs over period’s benefited, historical cost accounting.

Despite the fact that the auditor’s report is not a guarantee as to the future viability of the entity, it helps to establish the and credibility of the financial statements.

As pre the Sri Lanka Standard on Auditing when planning performing audit procedures and evaluating the results thereof, the auditor should consider the appropriateness of going concern assumption underlying the preparation of financial statements and any relevant disclosure. Consequently, the auditors’ attitude towards the financial evidence when forming the judgment of going concern assumption is a crucial factor.