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2020/21 Reporting Season: manufacturing and year-ends

4 December 2020: Johnathan Dudley is a Partner in Crowe UK, Head of Manufacturing, and Managing Partner of the Midlands practice. He is also Chair of ICAEW’s Manufacturing Community Advisory Group and has a significant audit practice reporting into him. What does he say about the 2020/21 reporting season?

“At the start of lockdown many auditors were pushing back because of going concern issues and were not confident they could sign audit reports,” says Dudley. “In some cases, that was with good reason but in other cases it was not.”

What happened early in the pandemic is now coming home to roost. “There’s massive pressure on finishing work that should have been done earlier,” says Dudley. “If decisions were not taken early on in the year and were constantly pushed back, that is having an impact now.”

Dudley says this has put some auditors and their clients into a very tricky position. “We, as an auditing practice, are in a better position now than most, but we are seeing a lot of people closing down – or trying to close down – December 2019 statutory accounts,” he says. “That’s a bit strange really. Going concern looks forward. The longer you leave it, the harder it might become.”

In terms of certainty about the future, Dudley believes we are no further forward now than we were at the beginning of the pandemic, so going concern statements are not getting easier to make. 

“I think the knock-on effect of this will be – and I am nervous about this – that the credit reference agencies will look at this situation negatively.” The fear is that there will be a bigger negative reaction from these agencies if a company has already delivered a poor 2019 performance which is then compounded by its poor 2020 performance – all reported on late and under pandemic conditions.

“Late information is one thing,” he points out. “Late and bad is quite another.”

Outlook for manufacturers

Dudley’s experience and expertise lies in the UK manufacturing sector. He says if companies encouraged staff to go back to work after the first lockdown and built the Job Retention Bonus into their 2021 business plan, this will now be unworkable because the bonus has gone. “That is something we in the manufacturing community have been campaigning about,” he says. 

“The other concern I have relates to what will happen when CBILS and CLBILS are no longer available from the end of January. What will be the appetite of the banks and other lending institutions to continue to fund growth and investment into 2021?” he says. “The funding that has been there traditionally has been plugging the hole that lockdown has created.”

Investment in UK manufacturing was sorely needed, regardless of the pandemic. “Before lockdown arrived, from a manufacturing point of view the robot count in the UK was a fraction of what it was in Europe,” says Dudley. “And low productivity is a criticism that has been levelled at the UK for the last couple of decades.”

So where is investment going to come from and what is Dudley’s prediction for the first six months of 2021? “I think businesses will fall into three categories,” he responds. 

“There will be the businesses that were probably on the road to tipping over anyway and will now go completely. They will take some of the next category with them. The companies in the next category will be businesses that were doing OK but have been damaged by the lockdown. They’ve probably not used the lockdown period sufficiently to get back on track because the new track will be a different gauge to the old track.”

He continues: “There will be businesses that were viable before that will become unviable because they haven’t been able to adapt. That will be because they do not have the right change dynamic or, even if they have the right change dynamic, they haven’t got the funding to deliver it.”

Dudley says the third category comprises companies that have adapted and/or moved into other marketplaces, and they will go onward and upwards. “Along the way, they may hoover up the businesses of the other two categories as they tip over,” he says. “I think there will be a lot of corporate activity going on next year.”

Key to survival is being able to imagine what the new post-COVID, post-Brexit, post-internal combustion engine world is going to look like. “Play to that,” says Dudley. “It’s going to be all about having the ability to play to successful change.” 

He perceives lockdown 2 as much harder for teams to cope with than lockdown 1. “I am really proud of what my team has achieved,” he says. “We focused on getting our people through this year and getting our clients through it.” 

He stresses the importance of daily communications with staff. “What I have been trying to communicate to staff is that they have a unique opportunity. This is not something we expected to experience in our personal lives, let alone as professionals. In 20 years, as a professional, you are going to draw on that experience.”

Dudley stresses that we will not return to business as usual pre-pandemic style. Not even the vaccine will take us back there. And the level of funding this year has been formidable, but it surely won’t continue, despite the need for investment in the manufacturing sector.

“And there’s going to be more requirement than ever to make absolutely sure that companies have got 12 months’ financing before auditors will sign off an audit report,” he reminds us.