Will the King’s Speech change the auditors’ approach to going concern?

KPMG issued a clean audit opinion on the December 2016 audits, only for a £845m contract write down and profit warning months later. So, who was to blame: the auditors or the directors?

Firstly, it is important to understand that the role of the auditor is to obtain sufficient appropriate audit evidence to conclude on the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements. In the case of Carillion plc, it was judged that KPMG carried out insufficient audit work which led to a record fine of £26.5m issued by the Financial Reporting Council (FRC).

The audit industry has also been impacted significantly by Covid-19, and in March 2020 we saw several audit firms put a halt to signing off on audits given the uncertainty of the future. The FRC publish findings on going concern disclosures, and areas of focus continue to include those industries with a high risk of failure that includes retail, construction and utilities.

In May 2022, the FRC released a revised going concern standard (ISA (UK) 570). This was a direct response following the demise of large companies such as Carillion and BHS and the continued need to improve professional scepticism from auditors. Simply, the revised standard requires:

• greater challenge of management assessment of going concern
• changes to disclosures in the auditor’s report to include a positive conclusion on whether managements’ assessment was appropriate
• “stand-back” requirements for auditors to consider all evidence obtained when concluding

The ‘Auditors versus Directors’ responsibilities in relation to going concern continues to be debated and creates an expectation gap – should the auditors really be blamed if directors are not safeguarding the company’s assets appropriately?

On 17 July 2024, Labour released a list of new bills via the Kings Speech, one of which is to: “investigate and sanction company directors for serious failures in relation to the financial reporting and audit responsibilities.” Could this mean that in future Directors could be sanctioned and the expectation gap decreases? I am not so sure.

Whatever happens, increased scrutiny on going concern reviews will continue and Directors and finance teams will therefore need to be prepared to robustly defend their going concern projections.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Kris Siva using the form below.