As the FT has noted this morning:
UK financial regulators are examining how many listed companies are set to issue warnings about their ability to survive the pandemic, as they seek to assess the impact on markets should share prices plummet.
Auditors have warned that there is a backlog of annual reports that are likely to question the ability of companies in the retail, hospitality, leisure and travel industries to continue trading as a going concern for the next 12 months.
]A flood of going concern warnings or qualified audit opinions – in which an auditor says there are misstatements or that they could not obtain enough evidence to sign off the accounts with a clean bill of health – could spook markets. There is also expected to be a rise in “emphasis of matter” audit reports, which highlight serious uncertainties around matters such as property or inventory valuations.
This is, of course, exactly what auditors have always been meant to do. The job of an auditor is not to issue a boiler-plate report saying all is well in a company when it is not, although that has on far too many occasions in recent years been exactly what has happened. The job of an auditor is to highlight issues of concern, and whether the count likes it or not.
Now that is likely, and unprecedented. As the FT notes:
A senior accountant who is close to the government said that a cross-sector wave of warnings “didn't happen during the last financial crisis, and as the future is far from certain there is lots of worry about this”.
And as they add:
The head of audit at one large firm said some major businesses had approached the government's department for business in recent weeks to complain that their auditors were putting too much pressure on them. “They have complained that we're being overly prudent,” the auditor said.
In this scenario there is no such thing as being over-prudent. What is required is honest opinion. The test of that will, in many cases, be that the client does not like the opinion offered. But that is not for the client to complain about. And if markets do not like the results, they should have quit earlier. What any auditor is going to say should have been known to any astute investor a long time ago (in current terms).
For once auditors have the chance to get something right. I really hope that they do not flunk it.
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I think you are optimistic to think the pandemic and Brexit will lead to a greater scrutiny and a higher level of opinion.
Here is an example of wording I have seen in relation to those risks;
“Covid-19 and Brexit are amongst the most significant economic events currently faced by the UK, and at the date of this report their effects are subject to unprecedented levels of uncertainty, with the full range of possible outcomes and their impacts unknown. We applied a standardised firm-wide approach in response to these uncertainties when assessing the company’s future prospects and performance. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company associated with these particular events.”
That sounds as boiler plate as it gets.
Basically it makes clear ‘you’re one your own here’
This sounds like audit companies putting themselves out of business by stating unequivocally that their valuations and even their endorsements are worthless in the current unprecedented economic climate. So be it 🙂
They have to be specific
Mr Kruse,
The problem is, it would not put them out of business, would it?
Hats off to Mr Gray for producing wonderfully fluent, orotund prose that takes us everywhere, nowhere and back to where we started, without noticing and none the wiser. Sounds authentic to me!
auditors on the up and up?that,ll be the day,the big four have it sown up for decades,they,ll give you any audit you want you just have to pay them enough,nothing will change for them.