Going Concern or Going out of Business?
The Covid-19 pandemic has significant implications for financial reporting with the biggest immediate impact likely to be on the Going Concern assumption.
Traditionally, the assumption that a company or organisation will continue to trade and satisfy its debts as they fall due, for a period of at least twelve months from the signing date of the financial statements, has underpinned the entire financial reporting process. However, Going Concern has often come under increased scrutiny in recent times, due to declining confidence in company financials, triggered by several large corporate failures. Questions have also been raised about the role of auditors in assessing businesses as going concerns.
With regulators observing, it is not surprising that this heightened scrutiny triggered a number of reviews of financial reporting and auditing including an independent review by Sir John Kingman of the Financial Reporting Council (FRC), an internal FRC review and various other studies. These, in turn, led to the publication last year of ISA (UK) 570 Going Concern Revised, a new International Standard effective for audits of financial statements for periods commencing on or after 15 December 2019.
More recently, with the outbreak of the Covid-19 pandemic, fears about the economic fallout have again thrown a spotlight on the Going Concern assumption.
Going Concern responsibilities of company directors and auditors
It is important to remember that directors are responsible for assessing whether their company is a Going Concern.
Directors, especially those of smaller to medium size companies, will be required to provide a detailed assessment, far above what they may have provided to their auditor in the past. To achieve this, it is likely that they will need to make their Going Concern assessment an on-going focus of their business throughout the year, rather than an annual regulatory task to be performed as part of the year-end audit process.
To step up to the challenge, many small to medium-sized companies will need to evolve their financial reporting processes so as to have the accurate, real time financial information they will need for their ongoing Going Concern assessment. For some companies, this will mean having to invest in new financial reporting tools and systems. Notwithstanding that this is a time when cash flows are being actively managed due to the Covid-19 pandemic impact and many companies and organisations are fighting for survival, investment in better quality financial information could be one of the most crucial business decisions directors make.
Auditors must challenge management assumptions
For auditors, the task will be to robustly challenge management’s assumptions and projections and live up to the higher standards expected under the revised auditing standards. Only by doing this can the audit profession further enhance shareholder trust and support the journey to economic recovery post Covid-19.