End of the year show: FDs prepare year-end accounts

Ask any FTSE main board director what kind of a view they have on the year ahead and, chances are, they’ll give you a weatherman’s reply: “Visibility 500 feet and closing”. Yet as virtually every auditor and finance director knows, if the audit profession was to throw up its hands and react with a blizzard of qualified audit reports, they’d be shooting themselves in both feet and the audit would soon become meaningless to users of accounts. If they don’t, and their clients sink without trace with a clean audit report nailed to the mast, they could be letting themselves in for some interesting litigation a year or so down the road.

Directors and auditors have some deep thinking to do as we pass the 31 December year-end date for many companies. The going concern issue is the most critical as it obviously not only affects the entire basis on which the accounts are prepared; it can also become a self-fulfilling prophecy if the auditors insist that it isn’t appropriate to use it, or if they qualify their audit letter in a way that gives current and potential creditors the willies.

However, everyone, including the regulator, has to tread carefully in the present climate so as not to throw organisations into a crisis unnecessarily. The Financial Reporting Council, the UK’s regulator with responsibility for promoting confidence in corporate reporting, has been very clear that directors and auditors will need to square up early to the challenges of making disclosures “relevant to going concern and liquidity risk”.

“The absence of confirmations of bank facilities does not in itself cast significant doubt on a company’s ability to continue as a going concern, nor necessarily require auditors to refer to going concern in their reports,” the FRC says, giving one example.

Andrew Vials, head of professional practice at KMPG, believes there is no doubt this is going to be a very challenging year-end. “If you looked hard enough you could probably find a material uncertainty everywhere, given the current turmoil in the markets, but going down that route would not be very helpful from a public policy point of view,” he says.

There may be litigation ahead if some users of accounts feel there is mileage in pursuing an audit firm should a company they have invested in go down, but Vials argues that there should be perfectly good defences available to auditors. “You can’t rule out litigation, but the defence has to be that proper judgements were taken on the evidence that was there at the time. Provided the accounts disclose the factors and judgements that were taken into account, one can expect the courts to realise that no one has a crystal ball,” he says.

“The key words are ‘material uncertainty that gives rise to significant doubt that the company can continue as a going concern’,” he says. There will be some difficult judgement calls around that, but where the threshold is not reached and a company gets a clean audit report, this does not mean that it is not obliged to disclose all the factors that the directors and auditors took into account.