The next step

Details on how to extend your company’s year-end

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An ongoing concern?

Going concern and audit reports

Company accounts are usually prepared on the presumption that the company will continue trading for the foreseeable future, i.e. it’s a “going concern”. What this means in practice is that before directors sign a set of accounts, they need to assess whether the business can continue to trade for a minimum period of twelve months from the date of approving the accounts. Auditors too, are required to determine, in their judgement, whether the directors’ assessment of the company as a going concern is reasonable. If they conclude that a “material uncertainty” exists that leads to significant doubt about whether the company can continue trading, they will have to modify their report to explain this.

Increased scrutiny

In the UK’s current economic climate, auditors’ reports are being scrutinised more than ever before by banks, suppliers, customers and others keen to determine the actual financial health of companies. A going concern red flag in the audit report may give rise to unwelcome consequences such as a lender withdrawing or declining bank facilities, suppliers stopping or interrupting the provision of credit or landlords seeking to exercise break clauses. If your auditors are suggesting modifying your company’s audit report, what can you do to convince them not to?

Prepare a going concern assessment

It’s likely that the auditors will ask you to prepare a formal going concern assessment. To make a reasonable assessment, you’ll usually need to prepare a cash-flow forecast.

Tip. Make sure your cash-flow period is for at least twelve months from the date you expect the accounts to be signed. So, if your year end is 31 December 2019 but you don’t expect the accounts to be approved until September 2020, your cash flow should be prepared up to September 2021.

Tip. Some auditors have been suggesting that every audit report should be modified because of coronavirus. We don’t agree - if your company has large cash reserves and no debt or is in a business less affected by the pandemic, then it wouldn’t appear to merit a modified audit report.

Tip. If your cash-flow forecast shows that you may need additional finance to get through the pandemic, try to agree this with your lender before the accounts are finalised so that you can provide further evidence to the auditors of your company’s going concern status.

Auditor still has concern?

If you can’t convince the auditor not to modify their audit report, you have several options.

Tip. The directors could defer finalising the accounts. Companies House has given an extra three months, so the accounts don’t need to be filed until twelve months after the year end, giving the company time to recover from lockdown (see The next step ).

Tip. You could apply to extend your company year end to a maximum of 18 months. This will delay the filing date by six months and provide even more certainty of how the company’s trade has been affected in the long term.

For details of how to extend your company’s year end, visit http://tipsandadvice-financialcontroller.co.uk/download (FC 12.10.02).