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2020/21 Reporting Season: construction year ends – more scrutiny, more problems

12 December 2020: The pandemic, social distancing, furlough and the spectre of Carillion are all adding to the pressure on the construction sector. Yet the UK’s economic recovery rests on infrastructure and house-building projects.

 For the construction sector, the Chancellor’s business support schemes during the pandemic have been a boon, says Brendan Sharkey, Head of Construction and Real Estate, and Partner in MHA MacIntyre Hudson. 

When the opportunity for support was offered, the industry was grateful. “Furloughing was a great idea because construction companies don't want to lose well-trained staff,” says Sharkey. “I can’t think of any client who hasn’t taken the support, and the majority of them have got their teams back together now.”

Sharkey has always been involved in the owner-managed sector, irrespective of the nature of their trade. “A few years ago, we decided to be a sector-led practice and build up partner knowledge and expertise in certain areas,” he says. “I always had construction as part of my client base and so I became one of the founding members of our construction team. Now I head up the construction and real estate team for the firm.”

He continues: “We've got 12 offices, and construction has become a significant part of our business with the actual gross income meaning it’s now our largest sector.”

So, what size of company are we talking about? “Our top 10 clients include those in the top 100 UK construction companies, as well as those with £200m turnovers, which is the marketplace we are focusing on. Our other clients include those currently at the £50m turnover mark, as well as growing owner-managed businesses.”

To what extent has the events at Carillion required auditors to ask more questions this reporting season? “We are being encouraged to make sure we've done as much as we can to cover the areas of risk. At this point in time, going concern will be an area of risk too,” he responds.

“I think everybody's on notice that audit standards are shifting upwards fast. Clients are picking up on this and expecting more, and rightly so. We're asking more searching questions to be comfortable clients have given us all the right information to enable us to get an accurate picture,” says Sharkey.

“Going concern is a problem for some. For the well-managed businesses, it's not. Hopefully, some have got reserves. They are used to cutting back when trade drops away. It's painful but they know how to cut.”

What’s important is there are opportunities looking forward. “Furloughing and grants have been a temporary solution and they are helping. Without them, some companies would definitely have found it very, very difficult. We haven't seen as many casualties as you would have expected,” says Sharkey. “But winter is a very challenging time: less work, people don't pay so readily. That's when there's time to reflect. Most reasonable-sized businesses will be able to cope but what they don't want to do is cut back now and then have a need for labour in the spring.”

Going concern looks at all of these points. “We’re actually saying: what are your reserves, what's your cash position? A lot of them are protecting cash. And that has a compound effect. If they're looking after their cash, that means somebody else might not be getting the cash they need. So, there's a domino effect in the marketplace,” says Sharkey. “Good companies will look after their subcontractors. There's a fraternity in the industry whereby companies try to look after each other, make it work. But you've got to be commercial, and going concern is about looking after yourself ultimately.”

Sharkey points out that smaller businesses can be a bit leaner and often work from a lower cost base. “But the same circumstances still apply. Unless you've got business coming in, there is a danger you will bid for work that's not at the right price,” he says.

Some companies were keen to get their accounts signed off quickly after their March year ends while they were doing well for fear that the credit rating agencies would view them less favourably over time. “The credit agencies are all over building companies,” he says. 

“Some are deferring their reporting, 12 months rather than nine months, and that's really just to make sure they've got their act together and give themselves a bit of breathing space.”

He continues: “The accountants behind these companies have had to work extremely hard to cope with all the pressures. And doing an audit remotely is really quite difficult from both sides.”

He continues: “We've done almost everything remotely. We have booked a day or two with management teams but, whereas previously we would have decamped to a client, we didn't do that this time around.”

He concedes the audit is not as efficient remotely because you lack channels of communication. “Audits have dragged on longer than they should have,” he says. But the bigger concern is for trainees who really need to sit next to a colleague and learn rather than work by themselves from home. Homeworking is not for everybody, particularly where employees are living in cramped accommodation or those with families where homeworking can be intrusive. 

“The second lockdown has brought more feedback on mental health issues and stress than the first one. Now I don't know if it's the seasonality or whether it’s just the fact that this has come back again, but there's definitely been a change,” he says.

So how different is the forthcoming year-end to previous ones? “It’s not necessarily any different to any other year-end. I’ve booked conversations with finance directors and managing directors, and I will do that online,” he says. “The aim is to start the planning for the audit and find out whether there are issues that need consideration now rather than leaving them to when we get onsite. We try to identify the key risks, so we know what we've got to deal with come audit time.

With infrastructure being a pillar upon which recovery will take place, is Sharkey hopeful for the sector? “Yes,” he responds. “The bigger infrastructure projects have continued, and small companies will feed off that. I have clients in the housebuilding sector as well and they can’t build quickly enough. It’s as simple as that.”

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Wellbeing in the 2020/21 reporting season

With the 2020/21 reporting season likely to be difficult for many, ICAEW reminds members of the resources available to them and their families from CABA.

The Audit and Assurance Faculty are sharing their webinar on maintaining wellbeing during audit busy season broadcast on 11 January 2021. Watch the recording.