Auditors warn of high failure rate risk for companies

THERE has been a worrying increase in the number of auditors' reports warning of the possibility that companies listed on the stock exchange could fail in the next 12 months.

THERE has been a worrying increase in the number of auditors' reports warning of the possibility that companies listed on the stock exchange could fail in the next 12 months.

The Tasmanian wood-chipper, Gunns, went into voluntary administration yesterday, less than a year after KPMG warned of the group's ability to continue operating as a going concern.

The mid-tier accounting firm RSM Bird Cameron yesterday released a review of listed company accounts lodged with the ASX for the 2011 reporting season, covering balance dates from June 2011 to May this year.

The review sampled 1042 listed companies, representing 52 per cent of ASX-listed companies.

It found that 15 per cent of audit reports included going concern-related issues.

It follows a similar report from 2008, where just 6 per cent of the reports sampled - a smaller survey of 315 companies - included going concern-related issues.

The phrase "going concern" refers to the likelihood that a company will continue to operate for at least the next year.

Jason Croall, a director of RSM Bird Cameron, said the rise in the number of auditor reports emphasising going concern-related issues was worrying because it could indicate a higher failure rate for companies.

However, it might also indicate that auditors were responding to a rise in legal actions against them by becoming more conservative and looking for ways to decrease potential exposure, he said.

"The question that I have is, with an increased prevalence of these, does it dilute investors' ability to really sort through the stocks that have a real going concern from the ones that just have a comment in there for, you know, cover your backside sort of stuff [by auditors]?" he said.

He also said he was concerned that the number of audit reports could increase to 20 per cent in the next two years as auditors continue to mitigate the potential risk of being sued.

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