Going going going … concern …

23rd January 2009
In the ever unfolding financial crisis, the next issue that may well come to the fore, and has already in some areas reached the headlines, is that of “going concern”.

This really is the concept on which the whole basis of accounting rests. The accounts and financial statements of an organisation are presented on the basis that the business will be able to continue to trade for the foreseeable future (normally at least one year from the date of approving the accounts). The assumptions that are made in how the numbers are presented are key to the going concern basis of preparation (for instance, an asset value will certainly be different if sold at auction on a “break up basis” compared to how it might be recorded in the Balance Sheet of a healthy going concern).

For those businesses that need to be externally audited, their auditors will look at the going concern basis of preparation very carefully and then ask themselves whether its application is appropriate in the circumstances. A big question now of course is can you, as company directors responsible for preparing the accounts, continue to apply the going concern basis? Many businesses are facing an uncertain future and even those that are perhaps stronger than some others still have this issue looming over their heads – will they be they be around in a years time? What level of certainty is there, given the present climate, that they can successfully weather the storm?

From the auditor’s perspective it is an unenviable task. If they decide that an “emphasis of matter” paragraph is required in their audit report to highlight a material uncertainty, or worse are forced to qualify their audit report because they disagree with the directors’ going concern basis of preparation, it becomes almost a self fulfilling prophecy – for when a modified audit report is seen in the public domain, people will lose confidence in that business and failure is much more likely. It is interesting for instance that this is already being discussed in the context of the major clearing banks – yet another problem for their ever deepening crisis.

Whilst many smaller businesses do not have the issues relating to an external audit the issue of going concern is still a real one. The directors have to sign off the accounts that show they believe the accounts are representative of the business and show a true and fair view of the company’s financial picture. One of the assumptions made is that the business is a going concern.

The directors must therefore prepare budgets and forecasts, review the company’s ongoing financing requirements and consider all factors that might affect the company’s ability to trade for the foreseeable future. If there are material uncertainties affecting the going concern basis, or if the period considered by the directors is less than 12 months from the date of signing the accounts, they must disclose these facts in the accounts. So the absence of an audit does not necessarily take this problem away.

The vast majority of businesses will find an overbearing requirement to ensure their business is presented as a going concern – understandably. It is therefore a critical issue which should be getting the urgent attention of directors. This will mean that they consider it in advance of their financial year end and address the issues as best they can. Then when they will be asked to sign a piece of paper that says their accounts are “right” they can understand what they are signing!

Contact Enquiry Form