The Curious Case of the Missing Going-concern Assessment

I will limit this discussion to the audit of companies, but the principles make governance sense for any entity. In general, management’s assessment of the health of their business is only an afterthought to satisfy the auditors, without them realising the disastrous consequences on the business and themselves as individuals, if they don’t do so. Somehow, the understanding of the effect of going-concern assessments by auditors is not much different, as the required procedures, in terms of the auditing standards, are followed in a boilerplate fashion, without considering or understanding the effect on stakeholders and management.

The Companies Act 71 of 2008 alone places a great deal of responsibility on management, directors, and audit committees to apply solvency and liquidity tests; not to trade recklessly; to report on the finances on a going-concern basis; to disclose material matters in their reports included in the financial statements; to exercise a duty of care; and to oversee controls and accounting practices. Because these requirements do not include the words ‘going concern’, management and auditors ignore them when addressing going concern in a business.

I am going to focus on the timing of raising significant concerns about the company’s ability to continue as a going concern. My observation is that auditors tend to see any qualification or emphasis of matter as a failure to provide the client with a clean report, and, therefore, clients’ explanations of going-concern issues and how they are being addressed are not questioned as rigorously as they should.

The responsibility of the auditor is to report on misgivings about the going-concern concept, and whether the entity will see the next year end, as soon as possible. If the entity still has a chance to survive, it will spur management on to implement the necessary measures. If the entity has a good chance of going into liquidation, it is to the benefit of stakeholders that it rather happens sooner than later. The audit report may be just the medicine to close a chapter.

When entities do not have going-concern issues, it is imperative that management apply their responsibilities, as set out above, as this will mostly prevent any such issues, and will make the audit report and disclosures in the financial statements more robust.

My experience with companies in financial distress, is that management goes into a state of denial, without planning, or expecting the sudden demise of the company.