The ‘Going Concern’ Argument Between Auditors and Directors

Concerns from investors have led to the Financial Conduct Authority (FCA) strengthening its stance on companies reporting on ‘going concern’ in recent years. This has included instructing auditors to be more vigilant in this area.

The guidance that the FCA released in 2016 addressed this issue. It was intended to reduce the risk of a company being signed off by auditors as a going concern only to almost immediately go under. However, the ‘going concern’ issue is now causing more problems than ever for directors and finance professionals. The global pandemic is making it very difficult for companies to assess ‘going concern’ due to the uncertainty that it has created.

No change to accounting and auditing standards on going concern

The FCA has confirmed that there is no change to the ‘going concern’ standards at this time. Companies are still expected to state whether they are a ‘going concern’ in their annual reports. This means that they have to address whether they are likely to remain in business for the next twelve months.

The assumptions that are used to determine this statement must be checked by external auditors. During this current period of uncertainty this is the cause of argument between directors and their finance teams and outside auditors. This is because any qualification could cause problems for companies when it comes to their dealings with creditors and investors.

It’s understandable that directors are concerned considering that many companies are currently closed and staff are furloughed. Any judgements regarding ‘going concern’ are difficult to make. However, the FRC are still instructing auditors to be as vigilant as ever, to ensure that investors get the reliable advice that they need.

Extension on time to publish annual reports

There is some good news when it comes to the relationship between directors and external auditors, and any potential discord. Companies have been provided with an extension period to use when it comes to publishing annual reports. This means that these reports do not need to be published until the end of September. This does at least give companies extra time in which directors and finance professionals can reach ‘going concern’ conclusions.

In fact, the FCA had advised against the provision of preliminary results and has told investors that they should not make negative judgements against companies that take advantage of the extension period.

Regulators have also said that government support should be taken into account when decisions over ‘going concern’ are made. This support is intended to offer protection for companies during what is envisaged to be a temporary downturn.

Even given these items of more positive news, it’s still a worrying time for companies. Directors and their finance teams are working hard to streamline costs and take advantage of available assistance, to ensure that their companies remain a ‘going concern’. However, reporting on this is likely to continue to remain a source of debate between directors and the auditors who need to independently check their reporting assumptions.

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