Poor Jon Corzine! What a pity his firm declared bankruptcy on Halloween. Because he has no more tricks to play, he will be receiving few treats.
Last week Francine McKenna must have had premonition of what was to come, for she asked us whether PwC should have issued a going concern opinion. Ok, maybe she was well connected with all the movers and shakers and was on top of the news about the firm. Or maybe she read the SEC filings. At any rate, she has discussed MF Global in “Are Cozy Ties Muzzling S&P on MF Global Downgrade?” and “MF Global: 99 Problems and PwC Warned About None of Them.”
To answer the question, yes, we do think PwC probably should have issued a going concern opinion. There were plenty of breadcrumbs to reveal the cupboard was bare.
SAS No. 59 (AU section 341) seems reasonably clear about the principles. It says in paragraph 2: “The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.” Paragraph 6 goes on to say the auditor should consider such things as negative trends in key financial metrics, indications of possible financial difficulties, and external matters that have occurred.
We wonder what is meant by this pronouncement and what evidence must be present to conclude that a going concern opinion is appropriate. Might that include four years (2008-2011) of massive losses, as occurred at MF Global? Might that include severely negative free cash flows for three of the last four years? Might that include an exposure to European sovereign debt that will lead to greater future losses? Might that include several downgrades in the credit ratings?
Unfortunately, our experience with Big Four practice suggests a myopic and unreasonable focus on the ability of the entity to pay its bills for the coming year is often the primary criteria driving the opinion. Indeed, the number of going concern opinions is decreasing when they likely should be increasing.
Of course, the word “substantial” that modifies “doubt” gives one pause whether sufficient evidence existed for PwC to issue such an exception. Worse, it makes one wonder whether an accounting firm ever has to issue such an opinion. Pity the standard setters.
P.S. Today we learn that MF Global is missing hundreds of millions of dollars of customer money. Gee, maybe the internal control system isn’t up to snuff.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.