What is the responsibility of the auditor with regards to the going concern of the client?

The financial reporting frameworks applicable in Ireland generally require the adoption of the going concern basis of accounting in financial statements, except in circumstances where management intends to liquidate the Company or to cease trading, or has no realistic alternative to liquidation or cessation of operations.

In some circumstances, material uncertainties may exist which may cast significant doubt about the ability of the Company to continue as a going concern. If this is the case, it is the responsibility of management to outline the details of these uncertainties and their potential impact on the financial statements as a whole.

Given the impact of the Covid-19 Pandemic (Covid) on the domestic and wider global economy there is a greater emphasis on boards of directors to set out clearly to the users of their financial statements, including shareholders and auditors, why they are satisfied that the financial statements should be prepared on a going concern basis.

Many sectors, including hospitality and retail, have been severely impacted by Covid and therefore the task of the directors to assess going concern can prove very challenging indeed.

Under Company law in Ireland, a Company is presumed to be carrying on business as a going concern. However, the accounting frameworks (IFRS and Irish GAAP) impose a requirement for directors to assess the ability of a Company to continue as a going concern. Directors need to satisfy themselves, shareholders and auditors that, having considered all available information about the future, the Company has sufficient cash resources and/or funding facilities to trade and to pay their debts as they fall due for a period, not limited to, but of no less than 12 months ahead. For emphasis, the 12 month timeline is only a minimum requirement, in that if the directors do not believe that ultimately they will be able to discharge the Company’s short and long term debts (i.e. including debts payable after 12 months) then immediate action needs to be taken by the board to protect all stakeholders of the Company.

If the directors cannot assess the ability of the Company to continue as a going concern with reasonable certainty, then they should take adequate steps to assess the solvency of the Company. If necessary, they should take all reasonable action to protect the creditors and shareholders of the Company from any further exposure that would result from trading in a reckless manner.

In the event of a situation where the directors of a Company continue to trade in a reckless manner, there are provisions under the Companies Acts which set out the penalties for doing so.

In assessing going concern the directors should consider the following:

The above list is only a sample of the issues that the board needs to consider in relation to discharging their responsibilities in relation to going concern. There may and probably will be others.

It is also worth noting that the recent changes to International Standard on Auditing 570, Going concern, place greater responsibilities on the auditor in respect of procedures to be undertaken and reporting on the Company’s ability to continue as a going concern. The auditor’s obligation has changed from a “we have nothing to report” approach to “we have concluded… based on the work we have performed”. This change to a positive opinion will ultimately result in greater scrutiny of the going concern assumption by auditors, which will most likely lead to an increased workload on management and auditors alike.

Finally, we recommend that management engage with its auditors early on in the audit process to front load the work that will be required to conclude on going concern. Be prepared for a greater amount of focus on going concern.

If you have any questions in relation to management and directors’ obligations relating to going concern, please contact a member of your GT client services team.

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What Is Going Concern?

Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If a business is not a going concern, it means it's gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.

Key Takeaways

• Going concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future.
• Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern.
• If a company is no longer a going concern, it must start reporting certain information on its financial statements.
• Negative trends that lead to no longer being a going concern include denial of credit, continued losses, and lawsuits.

Going Concern

Understanding Going Concern

Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.

Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything. Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products.

Going concern is not included in the generally accepted accounting principles (GAAP) but is included in the generally accepted auditing standards (GAAS).

Red Flags Indicating a Business Is Not a Going Concern

Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company's quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets.

A firm's inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later.

Going Concern Conditions

Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board determined financial statements should reveal the conditions that support an entity's substantial doubt that it can continue as a going concern. Statements should also show management's interpretation of the conditions and management's future plans.

In general, an auditor examines a company's financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.

What are the responsibilities of auditors and director regarding going concern?

Why are auditors concerned about going concern?

What is the responsibility of the management regarding going concern?

What are the considerations of the auditor in regard to the going concern assumption?