By:  Erin D. Hultman, CPA, MST
       Senior Audit Manager 

As our country is beginning to dig out of the worst recession in years, most nonprofit organizations have seen their financial stability take a significant hit.  But when does a period of hard economic times become a concern…a going concern?

One of the most basic accounting assumptions is the concept that a business is a going concern. Unless there is significant evidence to the contrary, it is assumed that an entity will continue to operate for an indefinite period, or at least for the foreseeable future.  Situations that may cast substantial doubt about the entity’s ability to continue as a going concern can be both internal and external.

Internal Situations:

• Negative cash flows from operating activities
• Recurring operating losses
• Negative unrestricted net assets
• Disposal of substantial assets
• Default on debt
• Insufficient resources to meet donor restrictions (inter-fund borrowing)
• Turnover in key management positions

External Situations:

• Loss of a major contributor
• Lack of ability to obtain additional financing
• Government regulation impacting industry
• Government budget cutbacks if a significant source of funding
• Uninsured or underinsured for unplanned events

As part of the annual audit, your auditors have to consider if the organization is at risk of not meeting its obligations as they come due.  In the past, this consideration extended to twelve months from the entity’s year end (statement of financial position date).  New audit guidance has extended the auditor’s consideration of going concern issues past the twelve month mark.  Auditors will now consider events occurring beyond the one-year time horizon.  If your auditors find that the organization continuing as a going concern is uncertain they might recommend adding a disclosure to the financial statements or may even modify their audit opinion on those statements.

As management of the organization what can you do to ensure your auditors have all the information they need to make a proper assessment?

• Develop a strategic plan for the short-term as well as the long-term.  The plan should include the steps the organization will take to address the issues of concern.  Make the plan as specific as possible.  What expenses or programs will be scaled back or cut?  Can the organization obtain outside financing or restructure current debt?
• Include cash flow projections to show how your organization can stay current on accounts payable.
• If turnover of key personnel has occurred, what actions are being taken to replace these positions?
• Address any restrictions that exist which could limit management’s ability to carry out the strategic plan.

The more detailed and feasible management’s plan is to address the internal and external factors of concern, the easier it will be for the auditors to determine the viability of the organization in the short-term.  Work with your auditors to develop a roadmap back to financial stability so you are no longer concerned about going concern.

Erin Hultman is a senior audit manager in Tate & Tryon’s Audit & Assurance Services department and can be reached at ehultman@tatetryon.com.