Financial reporting in a time of crisis
26 June 2020: ICAEW CEO Michael Izza explains the importance of going concern for auditing the effects of COVID-19, and how the Institute is supporting members with new resources.
This is a time when businesses face the double challenge of not only struggling – indeed surviving – from day-to-day, but also of trying to make the right decisions and plans for a longer-term future which has never looked less certain.
COVID-19 was always going to have significant implications for audit reports on company financial statements. Already directors and auditors are having to make some very tough calls in difficult and unclear circumstances. Even at the best of times, issues such as ‘going concern’, viability and resilience are never just matters of dry technical judgement. Against the current backdrop of volatility and vulnerability across the UK economy and around the world, they assume – in business terms – little less than life-or-death importance.
It is therefore vital that procedure and terminology relating to a business’s accounts are understood and applied properly and consistently. Equally crucial is the need for accounts to be transparent in the way they show the true impact of the crisis on a company’s performance and prospects. I am sure that ICAEW Members need very little rehearsing on this, but at this time I believe that we, as a profession, have a duty to make these things clear to the wider business audience, and to policymakers and commentators. In taking that message to those who might need reminding, this is what we intend to say.
Going concern and COVID-19
Going concern sits at the very heart of how audits address the business effects of COVID-19. I think there are four key points we have to get across.
First, a company is a ‘going concern’ if it is willing and able to remain in business for the foreseeable future. The accounts are prepared on this basis, meaning that assets and liabilities are measured on the assumption that the business will keep going.
Next, where there is uncertainty about whether a business can keep going for at least a year, preparers of accounts need to describe that uncertainty in sufficient detail. It is their responsibility to prepare accounts that give a ‘true and fair’ view. The current pandemic is creating uncertainty for many businesses, and this must be described in their accounts where material.
Third, auditors are independent of the preparers of accounts. They have to report whether, in their opinion, prepared accounts give a ‘true and fair’ view. The current pandemic will not lead to modified opinions in relation to going concern as long as preparers of accounts report in a true and fair way on the resulting uncertainty, and the auditors can obtain sufficient evidence. Investors will need to pay close attention to audit reports and give thought to the circumstances that led to particular disclosures.
Lastly, qualified and other ‘modified’ opinions only arise where there is an error, a disagreement over a particular matter or a lack of evidence in a particular area of the accounts, which affects their truth and fairness. This could include a ‘qualified opinion‘ or, in more serious circumstances, an ‘adverse opinion’ or ‘disclaimer of opinion’. This can have serious funding and regulatory consequences for businesses.
True and fair
Assessing whether accounts are ‘true and fair’ requires judgements on whether assets, liabilities and profits are presented adequately and appropriately. That in turn requires judgements on when such assets, liabilities and profits exist and how they should be measured. They can all be affected by the uncertainty of a crisis.
True and fair accounts can help investors to assess the viability and resilience of a business – and thus make their own judgements about its prospects – based on sound information.
The rigour that both preparers and auditors apply to making these tough judgements and detailed assessments will be crucial for businesses and economies at such a volatile time.
Many members will be very familiar with these factors; they are central to the training of every Chartered Accountant. But in a desperately unstable world they have fresh significance. Assumptions that have held true for many years could be called into question. Incremental and new information will often be disclosed as a result, including on factors relevant to going concern.
As the business impact of COVID-19 continues to unfold, we should expect company reports to reflect a great deal of uncertainty. It is vital that they are interpreted appropriately and in the context of the current unprecedented circumstances.
We have collated our resources in this area into a new Going Concern Hub, which we hope will inform and guide members through this challenging time.
But ICAEW will also be working with the media and with government and the regulators in the coming weeks to take what seems like common sense to Chartered Accountants and make it common knowledge for business leaders and investors.