The number of companies getting a red flag from auditors raising doubts about whether the company can continue as a going concern appears to be falling for a second time in 2010, with the number of new companies getting the red flag hitting its lowest level in a decade.

The latest analysis from Audit Analytics of audit opinions filed with the Securities and Exchange Commission shows that auditors are expected to express doubts about 2,875 companies in fiscal 2010, down from 2,994 in 2009 after a 10-year high of 3,328 in 2008. Overall for the decade, going concern opinions climbed from a low of 2,552 in 2003 to 3,300 in 2007 and the peak in 2008. While not all 2010 filings are complete to create a full and final picture of the year, Audit Analytics extrapolated an estimate for 2010 based on filings that are more than 90 percent complete and comparable trend data from prior years.

In addition to the decline in overall going concern opinions, the number of companies getting the going concern opinion for the first time declined to 584 in 2010 from a peak of 1,179 in 2007. The figure rose steadily from 2003 to 2007, then declined for the three years following. The decline in new going concern opinions came as a surprise to Don Whalen, director of research for Audit Analytics. “It looks like they will be the lowest in 11 years,” he says.

Whalen also points out that there was some improvement in the number of companies that filed a going concern opinion in a prior year, but not in 2010. Typically, companies that file a going concern opinion disappear in subsequent years, meaning they likely delisted or went out of business. A smaller number of companies, however, file a clean audit opinion after filing a going concern opinion in a prior year. The number of companies achieving that turnaround increased in to 267 in 2009 and to 271 in 2010, Whalen says.

As auditors assessed troubled companies' positions, they cited net operating losses, some of them recurring from prior years, as their greatest cause for concern in 1,361 instances. Following closely behind as a cause for concern, auditors expressed doubts about 1,027 companies because they were still in the development stage. Additional reasons for doubt included inadequate working capital or risky debt ratios, net losses since the inception of the business, and deficits in accumulated or retained earnings.