Theory of Going Concern

Introduction

The theory of going concern incorporates an assumption of continuing operating continuity for a company. An assumption of operating continuity, in turn, implies that a company will continue operating in the further as it has operated in the past. The going concern determination, thus, is an indicator that the auditor rendering such a judgment believes that the company in question (a) intends to remain in business and (b) will be able to meet its future financial obligations.

While the theory of going concern is one of the basic premises upon which modern financial accounting is based, however, it has its detractors as well as its supporters. The controversy surrounding the theory of going concern has become more intense as a consequence of the financial scandals that erupted over the past decade, as well as in the wake of the recent and ongoing economic and financial crisis. The controversy surrounding the theory of going concern, however, predates these events.

The theory of going concern is reviewed and assessed in this paper. The following two sections of this paper (a) trace the historical development of the theory of going concern and (b) state the current generally accepted accounting procedures (GAAP) applicable to the theory of going concern. These discussions are followed by an examination of the controversies that surround the theory of going concern. Suggested revisions to the application of the theory of going concern then are discussed.

Historical Development

The going concern theory evolved from continuous theoretical and practical considerations of how business enterprises should be valued. In the United States most of these deliberations commenced in the early years of the 20th century. Even at that early date, an important feature of the debates concerned the issue of valuing assets at their market values versus valuing assets within the context of their utility in conducting future business operations (Ball, 2009)....