Auditor ‘Going Concern’ Warnings Tumble After SPAC-Driven Spike

The number of auditors of public companies who had substantial doubts about the businesses staying afloat fell in 2023.

Auditors of 21.9% of public companies last year had doubts about their clients’ ability to continue as “going concerns,” down from 24.3% in 2022, according to a new Ideagen Audit Analytics report. The study analyzed annual reports for US companies and foreign groups that file with US regulators.

The fiscal year 2023 numbers of going concern warnings represented a return to pre-2021 levels, the report said. Both going concerns and total independent auditor’s reports slowly declined until booming in 2021, due in part to an unprecedented influx of special purpose acquisition companies.

The number of SPACs—blank-check firms formed with the purpose of targeting a private company to take public—peaked in 2021. SPACs with going concern warnings decreased 53% last year, while the number of filings from SPACs overall decreased 51%.

“The decrease in the number of companies that received a going concern in 2023 was pretty dramatic,” Marie Pupecki, an accounting research analyst with Audit Analytics, said. “It would be more exciting, but SPACs have been skewing the numbers for the last couple of years.”

Still, the rate of going concerns for SPACs remained high at 86% in 2023. The companies gripped Wall Street’s attention in 2020, but criticism from regulators, poor returns from companies that went public, and a shaky market contributed to their steady decline.

Life Sciences Tops List

The 2023 numbers also showed high discrepancies across industries, the research firm said. The life sciences sector has seen some of the highest rates of going concern opinions, reaching a peak last year at 36.4%. That’s up more than 13% from the industry’s decade-low point in 2020.

“Life sciences tend to be highly capital intensive,” Pupecki said. “They’re usually doing years of development before they come up with a product, so it’s not really unusual to see them with so many high going concerns. Many of them are not even in the active business mode at this point.”

In contrast, the real estate and construction sector saw its going concern rate drop more than 12% after reaching the highest rate of any industry over a 10-year period in 2022. SPACs are grouped within the real estate and construction industry.

Accounting rules require auditors to assess whether there is a “substantial doubt” about the ability of a company to continue as a going concern. The auditor must state the concern, if there is one, in a company’s 10K annual report. US accounting rules also require a company’s managers to disclose any doubts about their ability to stay in business and reveal their plans for financial recovery.

Still, nearly half of 2023’s biggest bankruptcies lacked the warnings typically revealed in these reports, according to a Bloomberg Tax analysis earlier this year. The analysis found that retailer Party City Co. and drug chain Rite Aid Corp., for example, were among companies that filed for bankruptcy last year without issuing a prior going concern warning.

Mike Shaub, a former accounting professor at Texas A&M University, said it can be difficult for auditors to issue going concern opinions.

“It’s a Catch-22 for an auditor,” Shaub said. A going concern warning “could become a self-fulfilling prophecy. All of a sudden, vendors don’t want to do business with this company, customers find alternative suppliers. There’s all kinds of problems that can arise.”