Impact on annual accounts
Be prepared for auditor discussions
Deadlines to resolve uncertainty may be pulled forward towards the annual audit statement, if the auditors bring up an emphasis of matter, or worse. Developments with material impact are nearly always the topic of serious discussions in the annual audit.
Impact of developments on auditor's review of annual accounts
The usually rather obligatory discussion in March/April with auditors about the assumed going concern outlook of the company may look very different in case of a crisis. In times of uncertainty, companies need to prepare themselves to thoroughly explain the impact of the developments on the company's future. The willingness of the auditor to approve the going concern basis for the annual accounts may be affected by increased uncertainty in financial forecasts, impairments of assets or foreign business units, and the not-unthinkable dependency of the company on the cooperation of third parties, such as financiers, for their business continuity. We expect auditors to dig in deep, and as a bare minimum ask the management board for their back-up plans and possibly even their strategy in a worst-case scenario.
Contact
Ferdinand Hengst
Partner
Bas Boutellier
Partner
Lisa de Boer
Senior Associate
Related expertise
Banking, Finance & Debt Capital MarketsRestructuring & Insolvency
Impact on going-concern statement auditor
The willingness of the auditor to approve the going concern basis for the annual accounts may be affected by increased uncertainty in financial forecasts, impairments of assets or foreign business units, and the not-unthinkable dependency of the company on the cooperation of third parties, such as financiers, for their business continuity.
Annual accounts are drawn up on the basis of a going-concern principle unless discontinuity is unavoidable. For a company, this means that it has to reasonably foresee that it will be able to meet its future obligations. The auditors will approve the going-concern basis only if the company is likely able to meet its obligations in the upcoming 18 months. This will usually be the case, even with declining profits or when impairments are required.
Annual accounts are drawn up on the basis of a going-concern principle unless discontinuity is unavoidable. For a company, this means that it has to reasonably foresee that it will be able to meet its future obligations. The auditors will approve the going-concern basis only if the company is likely able to meet its obligations in the upcoming 18 months. This will usually be the case, even with declining profits or when impairments are required.
Auditor's concerns to be addressed
However, in times of material uncertainty on key financial drivers, the going concern assumption may be put to the test. Typically, the concern lies in one of two triggers. The first big issue occurs where there is either a foreseeable shortness in cash or too little headroom in bank facilities, resulting in uncertainty about the availability of sufficient financing. The second big issue occurs where a refinancing is due in less than 18 months, resulting in the questionable ability to find financiers willing to commit sufficient amounts of refinancing capital. Especially if a substantial impairment must be made or EBITDA drops, the debt ratio will outweigh the assets or EBITDA, thus endangering the upcoming refinancing.
In most cases, the auditor will be satisfied with such discussions and a detailed and sufficiently long-term planning for continuous monitoring of the scenarios and their feasibility. Sometimes, an auditor requires an indicative heads of terms with the bank syndicate, shareholders, or other financiers; a commitment tends not to be needed at this stage. In any of these, the key is in a company's ability to convince its financiers and its auditors that the company has prepared itself for a number of outcomes, that the future of the company is not on the line and that the co-operation of third parties as required, may be assumed without material doubt.
Dependence on third parties may cause issues with auditor
To make matters worse, these two big issues not seldomly occur simultaneously. Regarding reporting, continuity is open to serious doubt as soon as the company's future depends – to a greater or lesser extent – on the cooperation of third parties such as financiers. If the required cooperation has not been obtained when the annual accounts are drawn up, the material uncertainty has to be thoroughly explained on in the annual report.
Approach towards auditors
In times of uncertainty, a solution-focused approach has many benefits over trying to understand the root causes. Our clients typically start identifying various scenarios and design a plan A, plan B, plan C to have readily available to put against those scenarios, should they occur. The Board will have to discuss with its financial and legal advisers the feasibility of the different scenarios, the required financing of each of the scenarios and the feasibility of such financing.