Will your business be judged a Going Concern?

By Adam Lloyd, Partner

Management teams currently engaged in the end of year audit process should be in no doubt that investors are expecting bad news. To avoid further damage to already battered share prices, companies need to get ahead of this early.

The current crisis presents a significant challenge for companies hoping to publish a clean set of accounts. In recognition of these challenges, the Financial Reporting Council (FRC) has issued updated guidance for auditors, recommending additional time may be taken, even at the risk of delaying company reporting. The FCA has also made it clear that the normal reporting deadlines should be extended to accommodate this.

Despite this forbearance, the new guidance also makes it clear that the FRC is not willing to dilute the veracity and integrity of the audit process. Given the number of high-profile accounting scandals in recent years, this should come as no surprise.

We are already seeing the major audit firms adopt a very strict interpretation of the accounting standards. The sensitivity tests they are employing in determining a company’s viability will significantly increase the likelihood of companies having to publish qualified accounts.

All accounts are prepared on a going concern basis and the auditor’s judgement on a company’s suitability as a Going Concern is a fundamental part of a company’s annual report. Any material uncertainties that could impact a company’s ability to continue as a going concern must be disclosed. To cast doubt on a company’s prospects in this way, has always been viewed very badly by investors and such qualifications have been extremely rare occurrences, up to now.

The challenge for management teams will not be to avoid qualified accounts, because they are almost inevitable in many cases, but rather to make sure the reasons are properly explained.

As with all bad news, investors need proper detail to understand the underlying issues so they can make their own risk assessments. Qualified accounts should lay out the sensitivity analysis employed by the auditor as that will help investors determine whether a company’s problems are short term or more deep-rooted.

The management teams that explain clearly and sensibly what the risks are, and how they plan to steer their companies in the coming months, will be the ones investors turn to.