Case 35 Surfer Dude Duds, Inc.: Considering the Going-Concern Going-Concern Assumption Mark S. eas!e", #rank A. uck!ess, Ste$en M. G!o$er, Doug!as #. %ra&it
'earning ()*ecti$es After completing and discussing this case, you should be able to - Understand the diculty of assessing the client’s goinc concern assumption - Descri Describe be the “self “self-ful -fulll lling ing proph prophecy ecy” ” aspect aspect of a goinggoing-con concer cern n modie modied d auditor’s report - Iden Identi tify fy fact factor ors s that that enco encoura urage ge obe obect cti! i!e e audi audito torr udg udgme ment nts s despi despite te the the presence of friendly client-auditor relationships
AC+G(D "ar# "ar# glan glance ced d up at the the cloc cloc# # on his his oce oce $all $all%% It read ead &'() &'() *%"% %"% he had had scheduled a (')) *%" meeting $ith +eorge “ang-ten” ald$in, chief e.ecuti!e ocer of /urfer Dude Duds, Inc% /urfer dude speciali0ed in selling clothing and accesories populari0ed by the 1alifornia “surfer” culture% "ar# had ser!ed as audit partner on the /urfer Dude Duds audit for the past si. years and $as about ready to $rap up this year’s engagement% e enoyed a strong client relationship $ith +eorge ald$in, $ho $as ordinarily a rela.ed and easygoing man, no$ going on 2) years of age% 3or se!eral years, "ar# "ar# had had rece recei! i!ed ed a pers person onal al in!i in!ita tati tion on from from +eor +eorge ge to atte attend nd a sp spec ecia iall 1hristmas party held only for +eorge’s employees and close associates% "ar# considered +eorge a good friend% In his si. years on the audit, "ar# ne!er had any reason to gi!e anything but a clean audit opinion for /urfer Dude Duds, Inc% ut this year $as di4erent% 5he economy $as in a mild recession, and gi!en the faddishness of clothing trends, /urfer Dude’s retail chain $as hurting% As sales decreased, /urfer Dude $as struggling to meet all its nancial obligations% 6etail analysts foresa$ continuing hard times for clothing retailers in general, and current fashion trends did not seem to be mo!ing in /urfer Dude’s direction% As a result, "ar# $as beginning to doubt /urfer Dude’s ability to stay in business through the ne.t year% In fact, after conferring $ith the concurring partner on the audit, "ar# $as reluctantly considering the addition of a going-concern e.planatory paragraph to the audit report report%% 7hen 7hen "ar# "ar# broac broached hed this this possib possibilit ility y $ith $ith +eorge +eorge se!era se!erall $ee#s $ee#s ago, ago, +eorge brushed him o4%
5he purpose of the scheduled (')) meeting $as to inform +eorge of the decision to issue a going-concern report and to discuss the footnote disclosure of the issue% "ar# rehearsed $hat he $as going to say se!eral times, but he remained uneasy about the tas# before him% 7hen "ar# arri!ed at +eorge ald$in’s oce, a secretary greeted him and told "r% ald$in of "ar#’s arri!al% 7hen "ar# heard +eorge say, “send him in”, he too# a deep breath and headed into +eorge’s oce $ith a smile on his face% +eorge $as spra$led out in a large e.ecuti!e chair, $ith his e!er-present smile% "ar# al$ays mar!eled at ho$ a person could in!ariably seem so rela.ed and happy% “ey "ar#, $hat’s up8 9ou #no$ I don’t li#e meetings onf 3riday afternoons”, +eorge ya$ned% “7ell +eorge, I’ll get right to the point% As you $ell #no$, the retail clothing mar#e has really gone south the past fe$ months% I #no$ I don’t need to tell yout that /urfer Dude is struglling right no$”% “I #no$, but $e’ll put out of it”% +eorge insisted% “7hen you fall o4, you’!e got to climb right bac# on to ride the monster, right8 7e al$ays manage to come out on top% 7e ust need to ride this one out, ust li#e the other times $e’!e struggled”% “+eorge, I #no$ you’!e high hopes that things $ill get better soon, but this time things are a little di4erent”, "ar# sighed% “I #no$ that you might ust be able to pull the company out of this% ut gi!en the circumtances, I thin# $e’re going to ha!e to lo## at including a going-concern e.planatory paragraph in the audit report% I substantially doubt that /urfer Dude $ill be able to continue as a going concern for the ne.t year% I also recommended that you include a footnote in your nancial statements to the same e4ect”% “7hat8 "ar#, you can’t go slapping a going-concern report on me: /urfer Dude $ill go belly-up for sure% ;o one $ill be $illiing to loan us any money% /hoot, nobody $ill e!en be $illing to sell us anything on account
uences if%%%” “"ar#, if you slap me $ith a going-concern report, there is no $ay $e’ll be able to pull out of this% 5hin# of all the people $ho $ill lose their obs if /urfer Dude
shuts do$n% *lease, I’m as#ing you to at least thin# about it%” +eorge’s e!erpresent smile $as gone% "ar# $as silent for $hat seemed li#e an eternity% “=#ay +eorge, let’s both thin# about it o!er the $ee#end% I’ll drop by on "onday morning so $e can $or# this out% 5han#s for your time”% "ar# $al#ed slo$ly out of the building and to his car% 5his $as not going to be a rela.ing $ee#end%
/0I/M/1S ?% 7hat are "ar#’s options8 &% o$ might a going-concern e.planatory paragraph become a “self fullling prophecy” for /urfer Dude8 (% 7hat potential implications arise for the accounting rm if they issue an un>ualied report $ithout the going-concern e.planatory paragraph8 @% Discuss the importance of full and accurate auditor reporting to the public, and describe possible conse>uences for both parties if the going-concern e.planatory paragraph and footnote are e.cluded% o$ might "ar# con!ince +eorge that a going-concern report is in the best interests of all parties in!ol!ed8 2% o$ appropriate is it for an auditor partner to ha!e a friendly personal relationship $ith a client8 % 7hat factors should moti!ate "ar# to be obecti!e in his decision, despite his personal concern for his friend8 B% In your opinion, $hat should "ar# do8
