The COVID-19 pandemic has brought about or created a lot of uncertainty, which is making it difficult for businesses to predict the future in terms of their business operations. With a lot of lockdown restriction imposed by government(s) and closure of non-essential businesses, business executives are worried about their company’s ability to generate sufficient cash flows to support operations. Some companies are also struggling with their debt covenant, liabilities to stakeholders (such as employees, shareholders, suppliers, vendors), and this has or is affecting companies’ ability to continue operations under the going concern assumption.
As companies contend with economic impacts of the global pandemic and related risks, challenges and uncertainties posed, management should be prepared for heightened auditor scrutiny in areas with going concern relevance.
Although some companies, sectors and jurisdictions may be more affected by this pandemic than others, all companies across all jurisdictions need to consider the potential implications for the going concern assessment. It is clear that companies in highly exposed sectors that are experiencing declining demand, falling sales and margins are the most impacted; particular mention can be made of the travel and tourism, hospitality/ entertainment/ sport, retail and oil industries.
It must be pointed out that a profitable business might not necessarily be a going concern business, especially in periods of negative cash flow.
Going Concern is an accounting term for a company that has the resource needed to continue operating indefinitely until it provides evidence to the contrary. It is assumed that every business will continue to be in existence into the foreseeable future. Management of businesses need to assess the business going concern and assure stakeholders of its continuous existence for at least the next financial year. In performing their duties, External Auditors are expected to provide assurance over the going concern of the business.
Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate any of its assets.
In this COVID-19 time, the going concerns of businesses need to be assessed by finding answers to the following red flags questions:
• Has the business lost its major supplier or customer due to the COVID-19 pandemic? E.g. as is the case in the hospitality and aviation industries.
• Can the business survive if this pandemic continues for the next 6 months?
• Is the business able to meet its contractual obligations without substantial restructuring or sale of assets in this COVID-19 times?
• What do the financial trends of the business look like? Are the business’s financials looking positive or negative?
• Can the business reinvest in new product development?
• Has work operations come to a halt due to COVID-19? Are people patronising the goods and/or services of the business?
• Is it possible to access other sources of capital; and is there an ability to develop a reasonable forecast?
• Has the business operation come to a halt and labour force asked to go home?
• Are there legal proceedings against the company for breach of contract or non-performance of contract?
• Are there significant deteriorations in the value of assets used to generate cash flows?
Since it has been established that COVID-19 will impact on the going concern assessment of companies, companies are required to disclose material uncertainties that COVID-19 presents which may cast significant doubt on their ability to continue operations.
Significant judgement will be required as no two entities, even if operating in the same industry, will be the same – but at the end of the day there will be one central question to answer: will the company have sufficient cash flows to meet their existing obligations and alleviate any conditions that raise substantial doubt about the ability to continue as a going concern in this COVID-19 time?
Raising additional capital through debt or equity offerings, reducing compensation, deferring planned expenditures, cost rationalisation, employee layoffs or obtaining government stimulus relief are some of the strategies business executives need to deploy when faced with going concerns risk in this time of COVID-19. Companies affected by the COVID-19 pandemic should take advantage of the various stimulus packages being offered by government and other institutions (such as banks and other financial institutions).
A change in business operation to reflect the current situation will also go a long to manage the going concern risk the company is exposed to. COVID-19 has taught us that remote working and digitisation is the way to go to survive. Innovations in the products and/or services rendered will go to helping stay afloat in times of uncertainty.
Another strategy that can be adopted to stay afloat during periods of uncertainty is to do or render better goods or services rather than concentrating on doing, producing or rendering more goods or services. Business Executives should re-evaluate and re-prioritise everything they do. They should evaluate their business offers against current and real-time needs by trying to answer the following questions:
• Is there anything that the business can start in this current situation?
• What business operations and/or products can we stop or scale back?
• What products or operations give us high-leverage to continue doing them?
A business-facing going concern risk in this COVID-19 time could manage the situation by getting creative and replacing marketing efforts with unconventional, low cost, high impact activities – such as launching a customer referral programme; building a social media contest for customers; making yourself and/or the business newsworthy, etc.
The last but not least strategy is for business executives to look to others for support and ideas. Get in touch with your chamber of commerce and industry players for resources and latest updates. This will help share ideas with others facing similar challenges and provide alternatives to come out best.
Even if management and auditors ultimately conclude that sufficient mitigating options are available to reduce the going concern risk to an acceptable level and disclose them in the audit opinion and financial statements, the presence of a going concern emphasis-of-matter paragraph – based on the language of the related debt covenants – could present a significant risk for a company. Management, in consultation with internal counsel and others, should carefully consider how a going concern opinion could impact their company’s ability to continue operating through the uncertain time ahead.
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