The current global pandemic has thrown the entire globe into a state of disarray and raised a very important question for auditors regarding the subject of going concern.
For those of a certain age, they may well remember the Year 2000 dilemma when at 1 second past midnight on 31 December 1999, the computers of the world were all going to crash and the world as we knew it then was going to change forever. Many large firms made very good consultancy fees advising on how to mitigate this, but when the time came and the clock ticked past midnight, nothing changed, and everything just carried on as normal.
Covid-19 is a different scenario completely. This came like a lightning bolt out of the blue and has literally brought the entire planet to a near standstill. No country and no business is immune to it and no business is large enough to be able to boast that they are too big to fail. National airlines are at a standstill, hotels are closed, holiday resorts are deserted, unemployment is growing, and Governments are forced to take unprecedented measures to stop economies from collapsing and slowly walking towards a depression.
So where does this leave company directors and auditors who have to consider the going concern basis of accounting for their financial statements, with the auditor in particular, needing to look one year ahead of his sign off date and ensure the company will still be able to trade.
Companies and businesses need to revisit their cash flow projections and forecasts. What was produced at the start of the year will now be woefully inaccurate and unreliable as things have moved on at such a pace that new forecasts are needed. It will be the case that one forecast by itself may not be sufficient and different scenarios should be played out in order to get a real feel of how the business is set to cope with such a contingency plan with so many unknowns at present. By being robust and open and honest, the directors will have an idea as to what decisions will need to be made.
The auditor will need to review these carefully and take into account the various government initiatives that have been made available to businesses to help them trade through these difficult times. For the UK, these include Time to Pay deals with HMRC where taxes can be deferred for 3 months, applying for the Coronavirus Business Interruption Loan with no charges or interest charged for a year, the Coronavirus Job Retention Scheme for businesses needing to close down their premises but with staff that cannot work from home such as hotels, hospitality, retail, etc.
These should all be factored into the cash flow and the auditor can review the various criteria and applications made, where required, to verify that the financial assistance is on its way. Businesses to have the best chances of succeeding and coming through this when it is finally all over will be those that can retain their key staff and so the Coronavirus Job Retention Scheme is a superb initiative to enable them to retain key staff and not have to employ all over from scratch and waste all that time training a whole new workforce.
Scepticism is fundamental to the auditors’ review and he needs to question the forecasts and digest the information provided and the assumptions made. The auditor can therefore form a subjective view on the going concern concept, taking all these factors into account and any other information that comes to his attention. There is no 100% certainty that even with all these measures, companies will not still fail, but the auditor can certainly make an informed decision and document on his audit file his conclusions. Directors will do likewise through the use of their Board Minutes and can highlight their thinking and assumptions made, thereby averting any accusations potentially of negligently trading whilst insolvent.
