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Going concern: challenge of multiple uncertainties

How does a company, and its auditor, deal with more than one going concern risk, and is the current approach fit for purpose, asks LSCA Technical Committee chair Jamie Tomlin.


December 2019

The revised ISA 570 on going concern raises the bar for auditors when planning, performing and reporting on going concern. The investment community, and (with the need for directors to focus on a broader group of stakeholders under S172 of the Companies Act 2006) other users will benefit from this raised bar. 

But despite these changes, the auditing profession (and indeed the entity itself) still faces huge challenges when dealing with going concern. One particular problem has made me think.

Let me explain my problem. My client has a single material uncertainty, which has a 50% likelihood of materialising. The client is confident it can survive; it will be tough, but they have a plan in place and the resources (financial and non-financial) to put the plan into action. A robust analysis suggests a positive outturn should be possible. In the short to medium term, the prospects are not rosy, but it is probable they should be able to survive.

Now assume that they have not one, but two such material uncertainties. Each is independent of the other and each has a 50% chance of occurring. But, while the company expects to survive one, should both happen they do not have the resources to deal with both. 

How do I combine these when considering going concern? If each truly does have a 50% chance of occurring, then combined there is a 25% neither will and a 50% chance that either one will. The company expects to remain a going concern here. 

My basic statistics, though, tells me that there is a 25% chance that both will occur and, despite the best intentions, management are really not confident that in this scenario the company will be a going concern. 

How does the company, and me as auditor, deal with this scenario? If we both agree to use the going concern basis but with the material uncertainties disclosed, there is a 25% chance of failure and, in retrospect, should this arise, has the company (and the auditor) got their assessment wrong? Or should a basis other than going concern be used, even though it is highly probable (if highly probable is 75%!) that the company will be a going concern? 

The Financial Reporting Council has moved the auditing requirement on, but is there also a need to revisit how we reflect going concern in the financial statements?  Is the current approach fit for purpose with the increased scrutiny of financial statements following a failure? If thought is not given to how this is dealt with, I see the inevitable further criticism of both companies and auditors. 

And, although I am no soothsayer, I am happy to predict with confidence that the choppy conditions ahead will inevitably lead to corporate failures.

Jamie Tomlin is chair of the LSCA Technical Committee and director of audit and accounting at Crowe

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