Auditors face huge challenges combating
uncertainty around going concern in the credit crisis and need
guidance from regulators, according to a UK mid-tier leader.

Liquidity is set to become a key issue for companies with
December 2008 year-ends, as auditors decide how comfortable banks
will be funding businesses over the next few years.

BDO Stoy Hayward managing partner Simon Michaels said audit
reports needed to be meaningful, but auditors “were caught between
a rock and a hard place”.

“On one hand do they draw out issues around going concern or do
they give a company a clean bill of health? What we really need is
guidance as soon as possible from the UK Financial Reporting
Council (FRC) on going concern statements and how accounts and
audit reports should deal with the general risks rising from the
economic climate. Without that, uncertainty is going to be
compounded,” he said.

Michaels wants specific guidance from the FRC that is tailored
to the current financial environment.

“We don’t want to have to qualify accounts if the market can be
given some guidance as to how best to deal with some of those
challenges, with regards to bank facility letters and comfort on
ongoing trading,” he said.

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A business is referred to as a going concern if it is able to
continue trading for at least the next 12 months. Company
management and auditors are required to judge whether the going
concern assumption is appropriate. If there is any doubt about the
continuation of trading, this must be indicated in the company’s
financial statements.

The FRC said it is due to publish some suggested key questions
for audit committees imminently. Those questions will address
issues such as going concern and liquidity risk.

Shortly after, the FRC will publish a short paper providing an
update on issues facing directors for December 2008 year-ends
relating to going concern and liquidity risk. This will bring
together the current requirements of the Listing Rules, Companies
Act (Business review) and IFRS.

KPMG UK chairman John Griffith-Jones welcomed any FRC guidance
on going concern and said it “was absolutely an area that requires
particular focus”.

Nicholas Moody