Large listed
companies have reported lower levels of going concern issues in
their audit reports than anticipated, but there has been a rise
among smaller listed entities.

A PricewaterhouseCoopers UK study found
only two companies had modified reports in analysis of the first 86
audit reports available from the FTSE 100 (45 reports) and FTSE 250
(41 reports) with 31 December year-ends. Both of those companies
were in the FTSE 250 and had an emphasis of matter paragraph around
going concern.

Qualitative research was also carried out
amongst PwC audit partners responsible for 30 FTSE 100 and FTSE 250
audits. It revealed companies had done more work to support their
going concern assessment this year in more than 95 percent of

PricewaterhouseCoopers UK audit partner Andrew
Ratcliffe admitted he was “surprised” the analysis did not pick up
more modified reports.

“What has happened, which is good, is
management have done a pretty thorough job in this section among
the larger companies,” Ratcliffe said. “There have been a limited
number of cases where the auditors have said ‘I’m sorry, that’s not
good enough you need to do more work’.”

A going concern assumption is issued by
management to indicate that a company is able to continue operating
for the foreseeable future. As the credit crisis has dried up
access to credit for companies of all sizes, investors are placing
close scrutiny on whether auditors believe companies are able to
continue trading as a going concern.

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Last year, PwC’s assessment of a similar
sample of companies yielded no going concern issues but the
heightened sensitivity surrounding this audit season had raised
fears auditors could flag a wave going concern problems.

Although larger companies appear to be coping,
smaller companies have produced a significantly higher number of
going concern issues, forcing auditors to issue emphasis of matter
paragraphs, which alert report users to issues within financial

“Our London audit practice has issued more
emphasis of matter paragraphs this year than last year,” said
Charles Hutton-Potts, an audit partner at Grant Thornton UK, which
audits the most Alternative Investment Market companies.

“I have personally issued more emphasis of
matter paragraphs. Some of those have not just been on a going
concern basis but actually some of the underpinning assumptions
that the directors need to bring to the attention of

Hutton-Potts said smaller companies are more
vulnerable to going concern issues because they are often more
heavily geared, have less developed balance sheets and are subject
to stricter covenant and borrowing conditions.

Increase in work, cost and

Both partners noted that companies have
increased the level of disclosure surrounding going concern
assumptions, which has led to an increase in the amount of work,
costs and fees.

“Because the assessments have been more in
depth and have been more stressed with more ‘what if?’ cases, there
is more material to review and it takes you a bit longer to review
it,” Ratcliffe explained.

“It has increased what we have had to do but I
would not say it is a major factor. With some clients that are up
against the wire, or some where the cases are more troubled or
there’s been a lot of iterations in that discussion, yes the fee
will be going up.”

Hutton-Potts added: “Depending on the nature
of the client the increased examination of going concern can easily
add 5 to 25 percent to the planned workload. Because it is the more
senior members of the audit team that tend to do the work it can
have an impact on costs and fees.”

PwC sets up internal technical panels to
consider difficult issues relating to audit. In the 2008 audit
season, the firm had two panels but this year there has been 30 –
an indication of the cautious approach auditors are taking.

“It is certainly about being cautious but also
the incidence of these problems is greater,” Ratcliffe said. “Bank
lines are more difficult and banks are being tougher on covenants
than they were a year ago.

“Whereas it’s good news that the larger
companies seem to be getting through it, we shouldn’t be fooled to
say it’s the same for everybody.

“You get down to the smaller companies and
clearly there are some very troubled situations.”