A CPA Australia research initiative has been examining auditor reporting of Australian Stock Exchange (ASX) listed companies before, during and after the global financial crisis with a focus on the extent of going concern.

One of the most prevalent and insidious facets of the so called audit "expectation gap" relates to an auditor’s role around going concern. This role, and a painful diversity of perceptions and expectations amongst stakeholders, is inevitably highlighted in the fallout from corporate collapse and wider financial failure. At a market and economy-wide level, questions around what role auditors could play in warning of systemic fragility or even impending collapse within the financial system have been recurrent in reflection post the global financial crisis (GFC).

A CPA Australia research initiative has been examining auditor reporting before, during and after the GFC, with a focus on the extent of going concern "emphasis of matter" (EoM) paragraphs amongst Australian Stock Exchange (ASX) listed companies. The project, a collaboration between the profession and academe, is essentially looking at where the auditor has highlighted significant uncertainty around the going concern assumption.

The research looked at nearly 16,000 annual reports covering the period 2005 – 2013. Preliminary findings indicate that a greater number of companies, 32 per cent of the entire ASX, were subject to a going concern EoM in 2013 than at any time during the turmoil of the GFC, when such reports peaked at 22 per cent.

The findings indicate that going concern EoMs are greatest in particular sectors including mining, energy and to a lesser but still remarkable extent, health, industrials and consumer staples. The financial services sector appears to have the lowest prevalence of going concern EoMs. It is also evident that the largest concentration of going concern reports was at the bottom end of the market in terms of market capitalisation.

Our research team is investigating what these stark findings mean for the profession, and importantly for the wider economy. Questions abound on what the causal factors may have been, whether what we’re looking at represents leading or lagging effects and to what extent this uncertainty has been realised in business failure or other identifiable changes in ensuing periods.

With continuing subdued activity in the Australian economy and unemployment stuck at stubbornly elevated levels, the fragility of many corporate entities signalled by the sheer extent of the findings is inescapable. This only serves to highlight the urgency of a community-wide debate, something for which CPA Australia has long advocated, about competitiveness, productivity and innovation as central elements of a prosperous economy.

For the profession – and this applies globally – the preliminary findings should give us all pause for thought as we contemplate lessons from the GFC and head fast toward a far more nuanced form of auditor reporting, as has already been adopted in the UK.

The Sharman report in the UK sought to address lessons from the GFC and set out a blue print for governance around going concern risk in addition to the clarity of communications about going concern form auditors and companies. Endless debate on the matters raised by Sharman underscores their complexity as well as how close to the heart they are for almost all stakeholders in governance and reporting.

The International Auditing and Assurance Standards Board’s (IAASB) auditor reporting project began with calls from investors for more detail on going concern in auditor reports but similar constraints mean the final standards expected later in 2014 will likely be considerably pared back in this respect.

The Australian Parliament has inquired into several large corporate collapses and found that these had highlighted important expectation gaps in respect to going concern. The Parliament recognised CPA Australia’s plain English Guide to understanding auditing and assurance as addressing this and other important expectation gaps highlighted in the wake of corporate collapses, incorporating the guide extensively in its final report on an inquiry into Australia’s financial system.

The emphasis in these inquiries has tended to incline toward the negative – businesses failing – rather than the reverse – businesses continuing, and indeed succeeding. This is not surprising given that it is the failure of businesses and financial systems more widely that often initially sparks such inquiries.

Integrated reporting (IR) provides the opportunity to focus on a more balanced perspective to help stakeholders better understand the key risks that may impact on going concern, how the business is addressing such risks and the bigger picture around how the business model is constructed to create value. Auditors have a valuable role to play in assurance of integrated reports, providing a level of integrity around the reasonableness of qualitative and broad disclosures.

Given the relevance of IR in understanding business models and continuity, this could be a way for the audit profession to move closer toward the other side of that yawning expectation gap than has been previously been possible.

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