3. Going Concern Evaluation in the US Context: The Respective Roles of Auditors and Managers

Although auditors were not required to search for any kind of illegal acts, SAS No. 54 did obligate auditors to notify senior management and the board if evidence of an illegal act was discovered. Specifically, SAS No. 54 and “Illegal Acts by Clients”, AU Section 317.03 of the AICPA Professional Standards, stated: “Whether an act is, in fact, illegal is a determination that is normally beyond the auditor’s professional competence. An auditor, in reporting on financial statements, presents himself as one who is proficient in accounting and auditing. The auditor’s training experience and understanding of the client and its industry may provide for recognition that some client acts coming to his attention may be illegal. However, the determination as to whether a particular act is illegal would generally be based on the advice of an informed expert qualified to practice law or may have to await final determination by a court of law.”

UCLA–LoPucki Bankruptcy Research is a data collection, data linking, and data dissemination project of the University of California, Los Angeles, School of Law (UCLA School of Law). This database contains data on all large, public company bankruptcy cases filed in the US Bankruptcy Courts.

The SIC code division called H identifies finance, insurance, and real estate activities. Companies belonging to division H (in the financial, real estate, and insurance sectors) have been removed from the sample because these types of companies are supposed to have unique financial features and specific regulations.

Forms 10-K are annual reports required by the US SEC that give a comprehensive summary of each public company’s performance. The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements. Forms 10-K, as well as other SEC filings, have been searched at the EDGAR database on the SEC’s website. In addition to the 10-K, which is filed annually, other data have been downloaded. In fact, in the period between these filings, and in case of a significant event, such as a CEO departing or bankruptcy, a Form 8-K must be filed in order to provide up-to-date information.

Channel stuffing consists in recording inventory as shipped before delivery or final acceptance. It is a loophole that inflates sales and earnings figures by deliberately sending retailers more products than they are able to sell to the public.

Cookie jar reserves are sums set aside to shore up profits in lean years. They are used to smooth out volatility in corporate financial results, thus giving investors the misleading impression that the company is consistently meeting earnings targets.

“Scott’s accountants and independent auditor had assured Kimberly-Clark that the original accrual, excluding the $45 million, was sufficient” (SEC 2002, d. Accounts Receivable Adjustments).

SAS No. 99 replaced SAS No. 82 (“Consideration of Fraud in a Financial Statement Audit”) that was issued in February 1997. This previous auditing standard was the first to mention “fraud” in its title. According to SAS No. 82, fraud could be of two types: intentional falsification of financial statements and theft of assets. For both of them, a list of risk factors should have favoured auditors’ detection and assessment of fraud. In spite of this attempt to specify auditing procedure against fraud, SAS No. 82 did not increase auditors’ responsibility to detect fraud beyond the key concepts of materiality and reasonable assurance (Mancino 1997).