Hayes & Co News

Going Concern issues raise many challenges for both auditors and directors when preparing annual reports and accounts. Directors and auditors have to make disclosures in their accounts about the company's ability to stay in business - or whether it can continue as a 'going concern'.

Directors need to ensure that they take an objective view of their business. They need to look carefully at cash flow forecasts. Doubts about the ability of a company to remain a going concern do not necessarily mean that it is, or is likely to become insolvent. If a business is unable to state that the going concern basis is appropriate, they should consider taking professional advice.

Addressing these challenges well before the preparation of the annual reports and accounts may help avoid last minute problems that might unnecessarily unsettle investors or lenders.

Anyone with particular concerns should talk to their auditor about their going concern review. It may help to draft the relevant disclosures about going concern and liquidity risk and discuss them with their auditors before the end of the financial year.

This is an extremely sensitive area in the current market. However, the banks say they do not solely rely on audit reports when making judgements on corporate clients. They will assess small businesses using other data such as monthly management accounts, so audit reports will surprise few banks. Nevertheless, there is still a risk that a modified audit report may have a negative impact on the company. Some may be tempted to avoid disclosing uncertainties in the accounts that could lead to modified audit reports. Others may be anxious about such disclosure alarming the banks and creditors. And if that resulted in a lack of credit or cash flow, it could potentially lead to insolvency concerns, which could raise the spectre of wrongful trading and make the directors personally liable for the company’s debts.

But failure to disclose uncertainties would be the wrong thing to do.

Under UK accounting standards, directors are required to assess whether there are significant doubts about their company’s ability to continue as a going concern. They are also required to disclose any material uncertainties relating to those doubts. If anyone failed to disclose uncertainties and the company subsequently became insolvent, not only would there be potentially wrongful trading issues but the directors may be subject to disqualification proceedings as a result.

It must also be emphasised that ‘going concern’ disclosures do not necessarily mean The End, and such doubts do not themselves signify businesses could be wrongfully trading. This happens when directors continue to trade where there is ‘no reasonable prospect’ that the company could avoid going into insolvent liquidation. In such cases, directors could be liable to make up any losses unless they can show they took every step to try and minimise the potential loss to the company’s creditors.

When a company is insolvent, liquidation becomes a real possibility so directors should seek the expert advice of a licensed insolvency practitioner, and consider taking legal advice.