The Validity Of A oing Concern'

Many a times managers find solution to various problems from outside their environment. Similarly, one of the objectives of the Sick Companies Act, can be achieved through the action from ICAI (self regulatory accounting professional body). The task that can be achieved is: to know when a company falls potentially sick, and the true financial shape of a potentially sick company. This will eliminate the chance for any budding sick company to value their assets on cost basis.

At present, the incipiently sick companies continue the practice of valuing their assets on cost basis called `Going Concern basis' in their balancesheet. On a later date when things go beyond the control of the management, the company declares its sick and is forced to value its assets at disposable value. Mostly, the disposable value is only a small fraction of total outside liabilities. This is due to a huge non-moving inventory accumulation, tardy and bad debtors, obsolete fixed assets worth much less, non-performing investments quoting at very low price.

 

Intervening period adds its share of operating demages. Auditors have the discretion to decide whether a company is a `Going Concern' and value assets on cost basis. To confirm whether it is a `Going Concern', there is no benchmark at present. As a result, inspite of symptoms like detoriating networth and operation cash profits, auditors do not qualify their report as to the validity of `Going Concern' assumptions. Among many, popular cases are Best & Crompton and Indian Bank.

Thus the ICAI must draft a standard, that specifies - the indicators to test a going concern, symptoms of incipient sickness, valuation of assets in case of potentially sick and sick companies. The proposed accounting standard can have four fold benefits

To make auditors' libile and responsible

Make management proactive to rectify the defects

Give true financial position of would be sick company

Eliminate the risk of a sudden switch over from a going concern to a sick concern, to the interested parties.