In recent weeks, the UK accounting industry has experienced unprecedented levels of uncertainty in a rapidly changing financial and societal environment. Regulators are making every effort to ensure that investors receive the most thorough and robust information possible given the circumstances. Primarily, they want to give companies and auditors the time they need to give better information. One area to pay particular attention to is going concern audit opinions, comment analysts at Audit Analytics
On 16 March, the Financial Reporting Council (FRC) provided guidance for auditors on gathering evidence, audit reviews, going concern assessments, and management disclosures about COVID-19.
Soon after, on 21 March, the Financial Conduct Authority (FCA) issued a two-week moratorium on the announcement of preliminary financial accounts. The main intention of the voluntary moratorium is to allow companies to fully address and disclose the challenges they are facing as a result of COVID-19, in addition to providing auditors and companies time to prepare their accounts.
Audit Analytics confirms that between 1 March and 8 April, there have been 60% fewer audit opinions signed than in the same period last year.
Following the moratorium, the FCA, FRC, and PRA (Prudential Regulation Authority) issued a Joint Statement on 26 March. It includes the FCA’s extension from 4 to 6 months after the fiscal year end, for companies to file their audited annual accounts.
Looking at the opinions that have been filed, auditors are frequently citing COVID-19 and the challenges of adequate disclosure amidst the uncertainty in their going concern assessments. From 11 March through 8 April, Audit Analytics has recorded 20 going concern explanatory paragraphs related to COVID-19. For 13 of these companies, this was their first going concern opinion.
During these difficult times, the most common reasons provided for the uncertainty surrounding a company’s ability to continue as a going concern include the ability to generate cash flows, the ability to obtain funding, and the risk of a covenant breach.
On 31 March, Ernst & Young LLP added an explanatory paragraph to their audit opinion to explain the uncertainty around The Gym Group plc’s ability to continue as a going concern.
“With the current outbreak of Covid-19 in the UK, the Group has had to temporarily close all of its sites as a result of enforcement action by the UK Government, and there is uncertainty over the length of the required closed period and the potential reductions in revenues resulting from changes in the behaviours of members once gyms are allowed to open.”
Not only has the pandemic required many businesses to close, it will likely change consumer behavior once they are able to re-open. Companies will have to consider how these business interruptions will impact cash flows.
On 6 April, RSM UK Audit LLP added an explanatory paragraph to explain the uncertainty around Yu Group PLC’s ability to continue as a going concern.
“We draw attention to note 1 in the financial statements, which indicates that the Group may be adversely affected by the growing impact of the Covid-19 (coronavirus) outbreak. The Group is assuming that it can manage cash pressures in the current unprecedented trading environment and that its credit facility provider will continue to be supportive and not withdraw the Group’s facilities in the event of a covenant breach.”
In the event companies are able to generate cash flows, they must consider their ability to meet or renegotiate debt covenants. Companies may be at greater risk of violating debt covenants or having lenders withdraw lines of credit in the event of a covenant breach.
That said, the Joint Statement addressed the topic of going concern and covenant breach in the PRA’s letter to CEOs. The regulators urge lenders to consider waiving a covenant breach caused by COVID-19. Further, they suggest that a going concern or modified audit opinion should not necessarily give rise to a default.
"In our view, the underlying reason for delays, modified audit opinions or material uncertainties about going concern in the context of the current environment will need to be assessed on a case-by-case basis."
There has already been a rise in going concern opinions and most companies have not yet issued their annual reports. This trend is expected to continue as companies issue their annual reports with the extended due date. The Retail, Real Estate, and Travel industries are particularly susceptible to going concerns.