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Auditing going concern for public sector entities

15 September: Should the current going concern audit requirements be relaxed for entities unlikely to disappear? A presumption some public sector bodies are a going concern could free up resources to audit areas that add more value.

ICAEW’s public sector team recently responded to Public Audit Forum’s consultation on Practice Note 10: Audit of Financial Statements and Regularity of Public Sector Bodies in the United Kingdom (revised 2020). A copy can be found here

We are broadly supportive of the direction that Practice Note 10 (PN10) has taken regarding going concern, with more focus on continuation of services and whether there are any known plans for a body to be demised through some form of government reorganisation. 

However, there is an increasing sense that going concern audit work, in respect of some public sector bodies, does not add value. Going concern for many entities in the public sector is not about liquidity, headroom or covenants: it is about whether an entity is sufficiently supported by the machinery of government and to what extent the continuation of its services is protected. These assessments are often based on political decisions rather than cashflow or other financial metrics-based criteria.

In our consultation response, we asked for a more straightforward approach whereby the auditor can simply confirm that the appropriate statutory basis is in place as part of the risk assessment. This then means the accounts are prepared on a going concern basis and this will be sufficient. For this to be effective, it will need to be clear what the specific circumstances are in which the entity and its auditor do not need to consider whether there are any material uncertainties. 

The inclusion of a rebuttable presumption that the entity is a going concern could be a way to take this forward. 

We welcome your views on auditing going concern in the public sector. Please email us at contactus@icaew.com.