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Clients’ going-concern status a cause for concern

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A perfect storm is brewing that could threaten the existence of some clients. With recession and stagflation in the offing, accountants will need to look at clients’ going-concern status very critically.

20th Apr 2022
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Over the past couple of years, we seem to have spent our lives attempting to overcome the consequences of a continuous stream of “perfect storms”. It is almost impossible to go for more than a day or two without hearing a worthy commentator on a news programme referring to the latest incarnation of that dread weather event.

The problem with devaluing what was originally an overwhelmingly powerful phrase is that when a true perfect storm turns up, the overused description becomes equivalent to the boy who cried wolf.

Anyone reading the economic tea leaves at the moment might conclude that UK businesses are about to face something that we might be obliged to describe as an impeccable concatenation or insuperable tempest – in other words, a perfect storm.

While the original Emperor Nero fiddled as Rome burnt using a violin, our latter-day classicist prefers to fiddle with the truth and his expenses, but the effect is the same.

We all watch in disbelief as the framework of the UK economy crumbles, partly as a result of a global downturn but significantly due to his government’s poor decision-making.

All downhill from here

When the economy is going downhill, it is inevitable that many of our clients will struggle to remain in business, some doing little better than those who cannot afford accountants’ fees and will literally be freezing and starving next winter. In such situations, we need to take action, looking into going-concern issues even more diligently and getting serious about collecting overdue fees before they become bad.

We will now be getting familiar with the constituent parts of this particular perfect storm.

Many may still be in denial but the Office for Budget Responsibility’s statistics prove that the decision to leave Europe has been very costly to date and show no reason for optimism in the short term.

We cannot get the workers that we need to support some industries, while Dover is effectively blockaded by red tape. Businesses are struggling to make purchases from Europe and have found even loyal, long-term customers on the Continent reluctant to trade with those on this benighted island.

Coronavirus is inevitably taking its toll, with the number of people sick every week remaining not far short of 5m or, expressed equally starkly, around one in 13 of the population.

As a result, most businesses are finding themselves short-staffed from time to time, some in the leisure industries to the point where they have to close down for short periods.

Energy and labour costs are growing like Topsy, while the Chinese response to Covid-19 could have dire economic consequences across the globe for months if not years to come.

With no kind of protections in place, this is likely to continue even if the sunshine and advent of summer dampen the effect in the short term.

Full-blown recession

There is no doubt that these factors alone would have justified talk about a perfect storm. That was before Vladimir Putin stuck his oar in and invaded Ukraine, ensuring that what looked like being a downturn is predicted to become a full-blown recession.

That appears to be the view of the International Monetary Fund, which is now predicting that the UK will perform worst of all G7 countries next year.

Only older readers will have witnessed the consequences of stagflation (low growth coupled with high inflation) other than as a theoretical topic that they learned while studying economics.

Regrettably, it looks as though we will have an opportunity to see it in practice before too long, with inflation already out-of-control and growth forecasts reined back every month.

Going-concern status

All of this matters to accountants since financial difficulties could threaten the going-concern status of a significant proportion of clients, especially those in industries where the recovery is taking longer to occur or these factors have a particularly negative impact.

Rather than delineating those that could struggle, it is easier to note the handful that may do well, such as energy generators and not much else.

As inflation heads towards double figures, any client with big loans could be in difficulties since there must be a question as to whether banks will continue to support businesses that are at risk of going under. Meanwhile, those generous government loans taken to stave off the immediate consequences of the pandemic are going to be called in before too long.

Whether Rishi Sunak remains in office as Chancellor of the Exchequer must be open to considerable doubt at present but his austerity-led response to a disaster for which he is at least partly to blame is unlikely to offer much hope to those struggling to keep their heads above water through the next few months.

Put all of this together and auditors are going to need to be even more vigilant when considering whether client companies can continue to operate on a going-concern basis.

It would be good to feel that many members of the glass-half-full brigade will manage to identify green shoots and, if that is the case, please cheer us up by responding to this article.

Replies (5)

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By Hugo Fair
20th Apr 2022 20:49

OK, your application for the role of Mr Gloom-and-Doom has been accepted.

But if you're going to stray from the factual into the murky world of politics, I'd prefer a little bit of substance to illustrate throwaway remarks like "Rishi Sunak's .. austerity-led response to a disaster for which he is at least partly to blame".
I don't even like the guy, but are you confusing him with the Osborne creature - and for which of the disasters you've listed (Coronavirus , Energy costs, Ukraine) is he to blame?

I enjoy a good polemic, but a bilious attack that doesn't openly declare its affiliation is not a good look - especially with an absence of any ameliorative proposals to give us hope.

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Replying to Hugo Fair:
paddle steamer
By DJKL
25th Apr 2022 14:52

I think Rishi may be Brexit tainted as to a greater or lesser degree are all the Conservatives.(and a few on the other side of the house)

"He voted three times in favour of May's Brexit withdrawal agreement. After May resigned, Sunak was a supporter of Boris Johnson's campaign to become Conservative leader. After Johnson was elected and appointed Prime Minister, he appointed Sunak as Chief Secretary to the Treasury. Sunak replaced Sajid Javid as Chancellor of the Exchequer after his resignation in February 2020."

https://en.wikipedia.org/wiki/Rishi_Sunak

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paddle steamer
By DJKL
25th Apr 2022 14:55

Your point about loans really depends on the types of loans, fixed term loans with interest rates controlled within, or capped, can in periods of high inflation disappear like magic, property leverage during high inflation can be very successful providing it can be serviced.

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By Donald MacKenzie
26th Apr 2022 10:22

We get that you dislike Boris and Brexit.
We note you ignore the relative success of the UK economy compared to the rest of Europe before the Ukraine war hit.
We know you STILL would take us back in to the EU.
We see you ignore the successes such as the vaccine rollout.
We see your lack of balance.

Thanks (4)
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By JD
26th Apr 2022 13:11

''Rishi Sunak remains in office as Chancellor of the Exchequer must be open to considerable doubt at present but his austerity-led response to a disaster''

What a silly comment backed up with no facts. Rishi problem has been his complete lack of any sort of basic financial control, whilst throwing money around like its Christmas everyday.

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