It's official we are in a global recession. For
public companies with a June 30 fiscal year or for companies
beginning to think ahead to their second quarter 10-Q, this is
likely to mean their audit committees and auditors will pay
heightened attention to accounting issues that may be thought
of as signs of the times.
As companies scramble to keep creditors and stockholders
satisfied, meet earnings estimates whenever possible, and
generally prosper during difficult times, it is only natural to
expect that the first instinct of many involved in the
financial reporting chain will be to take an optimistic view of
close financial and accounting questions. The desire to see the
glass as half full is basic to human nature. Since auditors
understand this, they will, where relevant, be looking closely
at several issues.
Particularly for financial institutions, audit committees
and auditors will review the company's exposure to off-balance
entities, as well as the timing and size of write-downs
associated with subprime or other mortgage related securities.
Similarly, companies holding auction rate securities will have
to consider valuation and liquidity questions carefully. While
most auction rate securities continue to pay current interest,
there is no liquid market for these securities.
In this environment, fair value accounting principles have
made it challenging for reporting companies with mortgage
related securities, auction rate securities or other now
illiquid assets in their portfolios. The character and quality
of the valuation procedures for such instruments may not
produce valuations that are based on reliable data. Fair value
accounting requires that management consider inputs to
valuation, from level 1 inputs, which are quoted prices in
active markets (which may not exist), to level 3 inputs, which
requires that where no active markets exist, preparers of
financial statements turn to other indicia of value, including
making informed predictions about future liquidity. Audit
committees and management will want to consider carefully any
assumptions regarding future liquidity.
In addition, for all reporting companies, audit committees
and management will be focused on the adequacy of current
liquidity and cash management procedures, the quality of
receivables, the financial health and solvency of suppliers,
the ability to access additional capital, and the quality of
management's plans and procedures to monitor and address all of
We are in the process of alerting our reporting clients to
expect that their audit processes are likely to be more
involved, more intense and more challenging than in past years.
And also more costly.