The affect COVID-19 is having on the UK economy is far-reaching. The strict social distancing measures that have forced businesses to close locations up and down the country and ask staff to work from home will make auditing company accounts more challenging.
This is particularly concerning for companies with June or July year-ends who have not signed and submitted their 2019 accounts. However, there is hope, and there are options available to directors, but they must take immediate action to prepare.
It is highly unlikely that auditors will sign a clean audit opinion without an ’emphasis of matter or material uncertainty’ paragraph, in time to file their accounts. Therefore, companies need to take advantage of the Companies House offer of a three-month extension to the accounts filing deadline. This extension is not automatic, and directors must apply for it.
The effects of the current COVID-19 outbreak are unlikely to require any adjustment to the numbers included within any financial statements drawn up to December 2019. However, the reason why auditors are suddenly so reluctant to put pen to paper is the paragraph in their report which reads there are no “material uncertainties that may cast significant doubt about the Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue”.
The concept of the auditors’ professional scepticism will kick in even harder, and there are likely to be very few businesses who will be able to demonstrate, with an appropriate level of certainty, that they can come through this period unscathed.
So before signing their report, auditors will need to look in some detail at companies specific circumstances. The old saying that cash is king has never been more true. Even if not in one of the sectors such as hospitality or tourism, with so many businesses closed or operating at significantly reduced levels, a thorough review of cash flow forecasts, debtor collections, stock ageing and asset values will need to take place. Yet the answer to all these questions is most likely “who knows?” If companies don’t know, auditors certainly will not.
Even after this extra work, it is possible that a material uncertainty related to going concern will exist. This may result in the auditor still expressing an unmodified opinion but, including a separate section in their report drawing attention to a note in the financial statements that discloses the matters of concern. These notes will require specific tailoring – auditors have been warned not to produce “boilerplate” wording. Unfortunately, this extra work is likely to come with additional cost.
So what should the directors do?
1. Apply for the Companies House filing extension
2. Make sure they are talking to their bank – many companies will be doing this
3. Review the short and medium-term cash flow position
4. Assess the level of government support available and apply for anything that may be needed
5. Keep staff updated – they are likely to be more worried than the directors
What you shouldn’t do.
Do not put your head in the sand, delay the audit and hope you survive to the other side. Even with your premises closed auditors should be able to carry out much of their work remotely and by video conference calls. Indeed Price Bailey has a robust business continuity plan which has been implemented in response to the COVID-19 outbreak enabling us to continue with our audit work.
Get the process completed as much as possible subject to that final review. Your bank will still need draft accounts and cash flows for you to receive their continued support. If everything does get pushed back a couple of months, companies may not get their first choice of staff and timings as other audit work which usually takes place later in the year will already be booked in with an auditor.
This post was written by Gary Miller, an audit partner in our Corporate team. To find out more about how COVID-19 could affect companies audit requirements, or how we can help, please contact Gary using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.