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Markets brace for possible surge in ‘going concern’ warnings

The term ‘going concern’ is used by accountants to indicate that a company has the resources necessary to continue operating indefinitely until there is evidence to the contrary

Bank of England - Markets brace for possible surge in ‘going concern’ warnings

While global markets appear to have made it through the worst of the volatility caused by the coronavirus pandemic, which caused massive losses in March, investors are now on edge for a potential flood of ‘going concern’ warnings that could hit multiple companies as a backlog of annual reports begin to clear the auditing process.

According to press reports, regulators such as the Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority are in talks with auditing firms to gain greater clarity on the potential scale of going concern and other warnings that could provide more detail on how each industry has been affected by the global lockdown restrictions.

Accountancy bodies are already warning of a coming storm of uncertainty in company finances. In April, the Institute of Chartered Accountants in England and Wales (ICAEW) issued guidance saying they expected to see “more ‘material uncertainties’ highlighted in audit reports in relation to going concern”, meaning accountants would be less certain about the ability to firms to continue operating.

“While [coronavirus] will affect businesses in different ways and to different degrees, it is likely to have a significant impact on audit reports on company financial statements for the foreseeable future”, the ICAEW said.

What is a going concern?

The term ‘going concern’ is used by accountants to indicate that a company has the resources necessary to continue operating indefinitely until there is evidence to the contrary.

It also refers to a company’s ability to keep making money and avoid bankruptcy. If a company is no longer a going concern, this means it had gone bust and its assets have been liquidated.

Certain parts in a company’s financial statements may serve as red flags that the business may not be a going concern in the future.

These can include the listing of long-term assets on its balance sheet, which can indicate the firm is planning to sell them to raise cash, or the firm having an inability to meet its obligations without restructuring or asset sales.

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