“A clean bill of health”—the much sought-after words for billions of people around the world during the coronavirus pandemic.
Throughout these unprecedented times, there has been and will continue to be a tragic human cost along with a devastating economic impact. Companies too are searching for their very own clean bill of health, particularly the ability to continue trading as a going concern.
Going concern in the current climate is proving a challenging issue for directors, audit committees and indeed auditors. Even predating Covid-19, it was very much on the minds of regulators, auditors, directors, management and the media.
Partly, in response to the Carillion failure that shook the audit profession to its very core, the Financial Reporting Council (FRC) issued an updated auditing standard (ISA UK 570) on the auditor’s work on going concern in September 2019. It requires greater work on the part of the auditor to more robustly challenge management’s assessment of going concern. Through this standard, auditors must thoroughly test the adequacy of the supporting evidence, evaluate the risk of management bias, and make greater use of the viability statement.
Its application is for financial periods commencing on or after 15 December 2019. In the strictest sense, it does not yet apply. However, the FRC is encouraging early adoption. Indeed, in this current climate, the FRC is expecting more disclosures around going concern and has stepped up with key messages to boards and to auditors.
Boards are required to have a “reasonable expectation” of the company’s viability over the period of assessment. And the FRC acknowledges that, during the current emergency and unprecedented pace of change, any reasonable level of expectation would naturally carry a much lower level of confidence.
On the point of going concern, the FRC thinks it is likely that more companies will disclose “material uncertainties” to going concern in current circumstances. It adds that “identifying such events or scenarios, boards may take account of realistically possible mitigating responses open to them”. It suggests that events related to Covid-19 “could lead to corporate failure because of the scale of their adverse impact on the company and its ability to avoid liquidation or because of their timing”.
The FRC and other regulators (the FCA and the PRA) have been sympathetic to the timescale many companies face. They have loosened guidance on timetables of when audits must be completed and accounts published. But regardless of the unforeseen circumstances we find ourselves facing, the same fundamental rules of the game rules must still apply.
Auditors must continue to challenge management strongly, and companies and management must continue to be as transparent as possible in the information that they present to the market to support informed decision-making on the part of investors.
It is the responsibility of directors to assess whether the going concern basis of accounting is appropriate, and auditors then put this to the test. The Covid-19 pandemic means there is plenty of uncertainty around.
Concerns around liquidity make going concern an even more fundamental area of judgment. With crisis management and planning urgently needing to be in place, it beholds auditors to challenge strongly. Are directors and management being clear and transparent?
Auditors must be conscious of risk. Typically, management may want to put the most positive and optimistic set of conclusions across. This all-important dynamic between the two must therefore be well handled by the audit committee. On one hand the committee will need to hold management’s feet to the fire and ensure the right action is being taken. The committee must ensure it sufficiently tests auditors too on how they exercise professional judgement and levels of scrutiny.
In practical terms, the delivery and finalisation of an audit is made more difficult by the Covid-19 pandemic, but not impossible. Lockdown and travel restrictions being imposed are hindering the auditor’s ability to visit client premises. Some forms of evidence gathering such as attending stock takes may become impracticable.
Work on going concern itself, understanding, challenging and testing management models and underlying assumptions, and reviewing disclosures, can proceed remotely, with appropriate time set aside for discussion and resolution of any concerns on the part of the auditor.
For the companies compiling annual accounts which reflect the previous 12 months, it is the words describing the events of the next 12 months that provide an almighty challenge for them and for their auditors.
Audit is accustomed to being in the public spotlight; the bright glare of the Covid-19 pandemic means this will continue to be the case. Auditors, along with directors and audit committees, have a very important part to play in ensuring that high standards of accounting, reporting and disclosure are maintained through these unprecedented times.
Mike Suffield is director of professional insights at ACCA.