Is any business a going concern?
Philip Fisher considers whether unqualified audit reports will become a thing of the past since few companies are currently going concerns, and asks how the going concern concept will be treated in the pandemic and post-pandemic era.
I've spent the whole of my post-qualification career working in the tax field, but anyone who holds an accounting qualification will recall some very basic facts about auditing.
First, no client wants to have their accounts qualified with the inevitable implication that there are serious issues relating to the financial statements. Secondly, one of the issues that can lead to such a qualification is a question as to whether the underlying business operates as a going concern.
In the ordinary course of events, many companies and unincorporated businesses might suffer from potential doubts about their ability to operate in future. For example, if survival is dependent on the support of financiers then auditors might wish to obtain some kind of comfort as to the continuation of that support.
However, in the context of a global pandemic that has led to the full closure of many businesses, with a drop in income to either a fraction of normal levels or zero, accompanied by the obligation to meet certain fixed costs, it must be doubtful as to whether many businesses can definitively be signed off as operating on a going concern basis.
An unknowable future
Part of the problem is the uncertainty. While the government of this country refuses to give any hints as to how we might escape the lockdown, it is impossible to know the extent of the damage to any individual business. At present, a remarkable proportion of the British economy is being supported (or more realistically hopes to be supported) by a combination of grants and, much more significantly, loans from banks or the state.
Loans will eventually have to be paid back, putting additional pressure on businesses that are already reeling on the ropes from the damage caused in the last month and the terrible prospects for the near future.
While it is fully accepted that some organisations might actually thrive as a result of the coronavirus epidemic, these are going to be few and far between, limited to a small number of industries. Indeed, it is quite frightening to discover that local councils, transport megaliths such as Virgin Atlantic and London Underground and, dare one suggest, certain countries have uncertain commercial futures.
This should undoubtedly present auditors with an insoluble dilemma. Using the standard measures that have operated for generations, a new standard audit report template should automatically be drafted to include a qualification on the basis that the company or business being audited is not a going concern.
The impossible going concern
Between the big hit as a result of the loss of business and the need to take on massive loans that may well create their own second wave of coronavirus-related disasters, it is hard to imagine that any auditor could definitively declare that many businesses in this country or elsewhere could be operated as a going concern at any point in the foreseeable future.
This will present an immediate problem, since banks, investors and other stakeholders might well take fright and close down businesses that are theoretically healthy, should the government decide to provide adequate loans and other financing on a bridging basis. It will also irritate clients, which is a perennial problem for any firm of accountants.
What can we do?
The 'what can we do?' is the point where I should probably duck out of the debate. One possibility is a continuation of the moratorium on signing accounts, although you would imagine that this can only last for a limited period.
Educating the world to the acceptance that almost no commercial operation can be treated as a going concern is another way out, although it is hard to imagine that banks and other stakeholders would be enthusiastic about this.
That leaves very little else apart from a change in government policy, providing more finance by way of outright funding rather than loans. It is hard to imagine that this will be popular in Downing Street or, for that matter, the country at large although such an approach may be a necessity if we are to avoid a recession that will last for many years, accompanied by unimaginable levels of unemployment.