When the Financial Accounting Standards Board (FASB) began reviewing the handling of the "going concern" declaration in FAS 157 a year or so ago, who knew what a big issue it would become for even mainstays of the corporate world. Today, Bear Stearns and Lehman Brothers are history, while the likes of American International Group (AIG) and General Motors are looking shaky.

Now the FASB is preparing to change the rules under which an auditor can declare a company to be a "going concern." Currently, auditors need only look out 365 days. If during that period, no event appears likely to threaten an enterprise's survival– even if there might be a known occurrence like a debt maturing one month later, which might be difficult to refinance–the company can be declared a "going concern."

Under a proposed new rule, set to become effective this June 15, the FASB would remove this "bright line" and require auditors to apply an "indefinite period" of "at least, but not limited to, 12 months."

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Melissa Maroney, project manager at the FASB, says that the change is designed to "capture events" occurring beyond 12 months in the future that are "reasonably foreseeable" and might materially affect an organization's ability to continue to meet its obligations."

The goal of the change is to make corporate managers into the "prime determinants" of whether an entity is a going concern, rather than the auditor, according to Maroney, in addtion to moving the declaration closer to the IFRS standard, which is more "principles-based" than the current GAAP standard in use in the U.S.

Senior managers are required to sign and assume personal liability for corporate financial documents, according to Sarbanes-Oxley, and if they know of potential problems out beyond 12 months, under this change they would be obligated to make those problems known to auditors, she says.

"The change is not intended to make the time period indefinite," notes Maroney. "It's left sort of loose."

Negative comments so far from major audit firms include Ernst & Young's warning that "an auditor's report that is modified to express substantial doubt about an enterprise's ability to continue as a going concern can become a self-fulfilling prophecy. We do not believe it would be an improvement in financial reporting, or otherwise in the public interest, for the FASB to adopt a standard that would potentially contribute to limiting the availability of liquidity to entities in the current environment."

Ernst & Young also predicted that replacing the current "bright line" with a vaguer standard would lead to an increase in shareholder litigation against auditors.

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