Risk and uncertainty in financial reporting and the auditor's role;

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Risk and Uncertainty in Financial Reporting and the Auditor's Role
D. R. Carmichael*
American Institute of Certified Public Accountants
Grant's Is Going Out of Business
Just as the newspaper, radio and TV ads say, this is an honest-to-goodness closeout sale. W. T. Grant Company, one of the nation's major retailers, has filed for bankruptcy.
Predictably—and it's one of the few accurate predictions possible when a company declares bankruptcy—everyone involved in the issuance of the financial statements, including the independent auditors, has been named in a class action suit alleging past financial statements were false and misleading. Such events raise a critical question: What is the auditor's obligation to warn investors of impending trouble?
A Look at the 1974 Annual Report
The untutored eye of the ordinary investor only had to be open to see W. T. Grant was in trouble. In his opening message to stockholders, James G. Kendrick, Chairman of the Board and President, outlined ". . . the three most serious prob­lems
facing the Company:
• A serious merchandise imbalance.
• The severe burden posed by the accelerated store expansion program.
• The excessive build-up of credit receivables, financed at high interest rates and administered through an exceedingly expensive credit program."
For the year ended January 30, 1975, sales dropped slightly, but $24 million was charged for store closing expense, net credit expense went from approximately $6 million to $161 million, and earnings showed a loss of nearly $177 million, after having declined to $11 million for the year before. Short-term debt had in­creased
steadily over the last five years to $600 million. The current ratio dropped from a range of 1.5 to 1.7 in past years to 1.2. Dividends per share of common stock were cut from $1.50 in prior years to 30¢.
All that information was spelled out in detail for investors. Anyone who con­tinued
through the annual report to the notes to financial statements found more
* This paper presents the author's personal views and is not necessarily representative of the
views of any AICPA Committee, the Commission on Auditors' Responsibilities, or other AICPA
or Commission staff members.
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