There was a time when a company wouldn't have dreamed about asking the public for money if its auditors had raised questions about its ability to continue as a "going concern." The dreaded warning -- accounting-speak for "This company may not be able to survive" -- receded in importance in recent years, along with most other conventional measures of financial health that investors expected to see before plunking down their cash.
Thanks to the recent near-death experience of health-oriented Web site
, fretting over going concern warnings is back in vogue. When Drkoop, running low on cash, issued its earnings on April 25 and disclosed that its auditors had raised the going concern flag, you could here the tut-tutting from one end of the Silicon Valley to the other.
But this sudden concern is another example of the venture capital-banking-entrepreneurial complex being "shocked, shocked" to find out there's gambling going on here. As if they weren't part of the regime that created Drkoop and other Web longshots that are -- heavens -- short on cash after funding massive (and unsuccessful) marketing barrages.
Take the characteristically bold claim that technology pundit Stewart Alsop made in his recent
column. Alsop noted that Drkoop.com had warned investors during its initial public offering about its auditor's doubts. "How the heck did Drkoop.com's management and bankers let the company enter the public markets with that kind of queasy backing from its auditor?" asks Alsop, a venture capitalist in Silicon Valley with
New Enterprise Associates
. He notes that he sits on the boards of four public and six private companies. "If any of the private companies filed for an IPO with such a letter from its own auditor, I would resign."
The thing is, Alsop
sit on the board of one company,
, that made such a warning in its IPO last July. "Absent the closing of this offering or raising of adequate additional funds, our independent accountants have expressed substantial doubt regarding our ability to continue as a going concern," warned Be, a decade-old software company that began life as hardware maker and has
tweaked its business plan a number of times since Plan A failed.
"Oops," Alsop emailed back after I pointed out his gaffe. "You got me on Be. I thought we had managed to resolve the going-concern issue before filing, but we didn't." Alsop is quick to note that because Be faced relatively rough waters completing its deal, it priced its IPO realistically, at 6, and therefore the shares are above their offering price, a claim many in the IPO Class of '99 can't make.
Be's shares, after zooming as high as 39 9/16 on takeover rumors, closed Tuesday at 7 15/16, down 2% for the day. (According to its 10-K annual report filed with the
Securities and Exchange Commission
, Be had $56 million in cash and short-term investments at the end of the year; that filing contains no going-concern warning.)
Alsop, who got into the tech biz as a journalist, is a good sport to discuss his memory lapse. But it's not surprising that the long-ago warning slipped his mind. As venture capitalists and investment bankers have become more and more brazen about taking early-stage (and sometimes ill prepared) companies to the market, little things like auditor warnings have faded in importance. When I pointed out last year that IPO documents for Be and
carried going-concern warnings, contacts in Silicon Valley said I was out of touch because it was -- and is -- so easy to raise capital.
Even after the recent confidence-shaking plunge in Internet stocks, the warning doesn't exactly elicit trepidation. "Any chief financial officer worth their salt can still explain a going-concern opinion in a proper way so as to convince investors that it isn't a major concern," says Fin Most, a San Jose, Calif.-based partner with the accounting firm Ernst & Young. "It is simply based on what we see at the time."
According to Most, accountants must investigate further any time the finances of a company raise concerns about its ability to continue operations. If the auditors apply the words "substantial doubt," that means they've officially raised red flags for investors. It generally means there isn't enough cash lying around to fund operations for a year. But Most contends that tech investors long ago stopped demanding solid financials in IPO prospectuses -- if, indeed, they bothered to read the documents.
"If you're going to play in that space than you're not worried about the earnings statement or the balance sheet," says Most.
He's right, of course. But that's the problem. How many investors in Drkoop -- the name itself spelled unquestioned integrity, didn't it? -- really read the fine print when the Web site floated its shares last summer? Now it's too late. Sure, they should have known better. But it's a costly lesson. Shares of Drkoop have plunged from a high of 45 3/4 to 2 13/16.
"Obviously, going-concern warnings are serious and signs of potential financial trouble," says Francis Currie, a corporate lawyer in the Menlo Park, Calif., office of Davis Polk & Wardwell. "I get very worried about a going-concern warning."
He's right to be worried. And so too should investors be.
Like visitors from another planet...
You know this tech thing is really catching on when executives from Old-Economy companies take on roles at New-Economy ventures. It was easy to understand the move by George Shaheen, the tech-savvy and Palo Alto, Calif.-based head of
, who bolted to become CEO of delivery-on-demand retailer
. And it made sense that
would recruit a former airline guy in Warren Jenson to put its huge operation into fiscal shape as chief financial officer. And
convinced Patrick Garner, a sugar-water marketer at
, to market tart financial news instead.
But you know tech/nontech integration is nearing completion when a public utility executive goes to a networking equipment maker.
, an early networking market leader gave up the advantage to
, hired Michael Rescoe to replace Christopher Paisley, the company's longtime finance chief. Rescoe had been chief financial officer of
, the parent of Northern California's electric and gas utility, Pacific Gas & Electric. (Yes, it's also the corporation demonized in the recent Julia Roberts drama "Erin Brockovich,")
Rescoe, 47, had left PG&E "to pursue other opportunities" by the time his successor there was named in September, according to a PG&E press release. He was at a company retreat Tuesday and wasn't available for comment. Paisley, 3Com's CFO since 1985, joins the list of wealthy Silicon Valley veterans leaving for a higher calling. He'll be joining the faculty of Santa Clara University, initially teaching accounting to MBA students. Maybe he can remind them to keep an eye on those going-concern statements.
Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at