SAS 34 procedures vs. forecast reviews: The Gap in GAAS;

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SAS 34 Procedures vs. Forecast Reviews: The Gap in GAAS
Robert S. Kay
Touche Ross & Co.
Overview of the Paper
This paper explores the guidance given to auditors in early 1981 in SAS 34, "The Auditor's Considerations when a Question Arises About an Entity's Continued Existence," in comparison with procedures contained in the AICPA's 1980 Guide for a Review of a Financial Forecast ("forecast guide"). In the author's opinion, there is little differentiation in the satisfaction the auditor/reviewer is to obtain under these two forms of guidance, and the result may be that the auditor will be called upon for failure to have performed at the level of the forecast guide. Neither document has been in existence long enough for such problems to have matured, but based on the evolution of accountants' liability, the author foresees significant challenges in court unless the auditing profession promptly reconciles the two documents.
It is important to recognize that the forecast guide calls for a display of the most probable future result, which could be considerably more difficult to achieve than the prediction implied by SAS 34—that is, that a company will have zero or better net cash inflow, without identifying any specific amount thereof. To this extent, one would expect the forecast guide procedures to be more penetrating. Accordingly, this paper knowingly makes a more aggressive case than probably is applicable for audits today.
The views expressed in this paper are a priori, fortified by experience with several practice cases where the auditor recognized the problem and aimed at the forecast guide levels of attainment, believing this was the prudent approach in the clients' circumstances. In this sense, the author offers thoughts on what he perceives to be an emerging problem facing the auditing profession. Experienced accountants can be expected to disagree on whether a problem is emerging, and if so, how to solve it.
A Gathering Storm
In the current economic environment, businesses face an unprecedented and sustained liquidity crisis; failures are common and increasing. Consider for example the thrift industry, which in an unregulated environment (without FSLIC or FDIC assistance) would be faced with cataclysmic disaster through having lent long and borrowed short. Should the auditor be exceptionally alert in these circumstances? How much responsibility will have to be borne for these failures?
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