Recently, you may have noticed the term going concern referenced in your audit report, representation letter, or board discussions. This may cause concern or even feel alarming. For many nonprofit leaders, it raises an understandable question: How concerned should we be and what changes should we consider? The short answer is, it depends. Read on for the details of what it depends upon, but first a little background.
What Is Going Concern?
The Financial Accounting Standards Board (FASB) defines Going Concern as follows:
Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.
What Must Management Evaluate:
Under Generally Accepted Accounting Principles in the United States (U.S. GAAP), management must assess whether the organization can continue operating and meet its obligations for at least 12 months beyond the audit report date. (Note that this is not the year-end date, but rather the date of the audit report.) This assessment considers the current financial condition, known events or conditions, reasonably foreseeable future events, and management’s plans to address any identified risks through one year after the report date, and any known factors of impact beyond that time frame.
What Do Auditors Look For?
Auditors follow a structured two‑step framework
Step 1: Are There Conditions That Raise Substantial Doubt?
Auditors evaluate whether conditions or events exist that could raise substantial doubt about the organization’s ability to continue operating. Common indicators include:
- Liquidity and Cash Flow – Recurring operating deficits or negative cash flows; Low cash reserves or limited days in cash on hand; Dependence on short ‑ term borrowing or lines of credit; Difficulty meeting payroll or vendor obligations as they come due
- Funding Concentrations and Revenue Risk – Heavy reliance on a small number of donors or grantors; Heavy reliance on one type of revenue; Expiring grants or contracts without identified replacement funding; Loss of a major donor, foundation, or government award
- Statement of Financial Position Stress – Negative or near‑zero net assets without donor restrictions; Large current liabilities relative to current assets; Debt covenant violations or loan defaults
- Operational Red Flags – Layoffs, furloughs, or program closures; Significant management turnover; Fundraising shortfalls relative to expectations; Board intervention to maintain solvency
If none of these conditions rise to a meaningful level, no substantial doubt exists and no going concern disclosure beyond managements and the auditor’s responsibilities is required.
Step 2: If Substantial Doubt Exists, Do Management’s Plans Alleviate the Doubt?
If substantial doubt is identified, auditors then request and evaluate management’s plans to determine whether those plans alleviate the doubt. To be considered, plans must be: – Probable – not merely aspirational – Within management’s control and Supported by evidence, not just intent.
Examples of persuasive evidence may include: evidence of a turnaround in interim financial periods, evidence of ability to maintain positive cash flow in the upcoming year from the report date, as shown in a cash flow forecast, along with supporting documentation such as proposals in process with donors, executed grant agreements, signed contracts, formal loan modifications, approved cost‑reduction plans, or documented access to liquidity.
The Three Possible Outcomes When a Doubt is Evaluated:
A going concern evaluation typically results in one of three outcomes:
- No Substantial Doubt Identified
Result: No financial statement disclosure is required, other than management and the auditor’s responsibilities which are now included in every audit report. - Substantial Doubt Exists but Is Alleviated
Result: A footnote disclosure is required describing:
– The conditions that raised substantial doubt
– Management’s plans that are expected to alleviated the doubt - Substantial Doubt Exists and Is Not Alleviated
Result: A financial statement disclosure is required and the audit report will includes an emphasis‑of‑matter paragraph. The footnote will explicitly state that substantial doubt exists about the organization’s ability to continue as a going concern.
What to Prepare for Your Auditor
If your evaluation indicates that a going concern issue may exist, early preparation makes a meaningful difference, both in audit efficiency and clarity of communication.
Key items to prepare include: – Cash flow forecasts covering at least 12 months from the expected issuance date; Board‑approved budgets that address known deficits or funding gaps; Executed funding support, such as signed grant awards or donor commitments; Funding proposals that are in process, with a likelihood of success noted; Documented cost‑containment plans, including actions already implemented; Liquidity documentation, such as available lines of credit, loan amendments, or access to reserves.
Just as important, communicate transparently with your board and your auditors early in the process.
Why Going Concern Matters More Right Now
Many nonprofits are operating in a more volatile environment than in prior years, driven by:
- Government funding uncertainty,
- Revenue concentration among fewer donors or foundations,
- rising operating costs (including facilities, staffing, and events), and
- Tighter credit markets and higher interest rates
As a result, we should reasonably expect to see more going concern disclosures in 2025 audited financial statements, due to the increase of uncertainty and risk across the nonprofit sector. To summarize the possible outcomes of a going concern evaluation on the audited financial statements, there are three possible outcomes.
1. No substantial Doubt Raised
a. Standard audit report disclosures of Management and auditor’s responsibilities
b. Management should continue to monitor and evaluate the organization’s ability to continue as a going concern on a regular basis and work to diversify revenue streams and keep costs under control, and monitor it’s environment to catch and adjust for risks as they are identified
2. Substantial Doubt Raised, Alleviated by Management’s plans and Related Support
a. As noted in item 1a, with the addition of a footnote disclosure of what raised the concern and management’s plans to alleviate that concern
b. As noted in 1b, and in addition, management should closely monitor the organization’s ability to meet the plan and adjust the plan as may be indicated
3. Substantial Doubt Raised, Not Alleviated by Managements Plans and Related Support
a. Both above (1a & 2a) with the addition of an explanation of matter paragraph to the audit opinion
b. Both above (1b & 2b) with the addition of closer and more frequent monitoring of cash flow, and the success or failure of management’s plans to “right the ship” and eliminate doubt about the organization’s ability to meet its obligations and pave the road for the organization to continue its mission
Final Thoughts
A going concern assessment under U.S. GAAP evaluates whether an organization can continue operating and meet its obligations for at least 12 months after financial statement issuance. It highlights whether uncertainty exists and how management is addressing it.
Organizations that proactively assess going concern, document their plans, and engage their boards early are better positioned for productive audit discussions and stronger governance.
At Han Group, we’re committed to helping nonprofit leaders. If you have questions about going concern considerations or would like help preparing for your next audit cycle, please reach out to your engagement partner or manager. Early planning leads to clearer outcomes – and fewer surprises. Contact Us.
