In Edition 27 of Chartered One we considered the different interpretations of the Going Concern Statement required under IFRS and FRS, pointing out that both the FRC and the ICAEW had issued guidance during 2020 to assist management and auditors with the tricky matter of Going Concern assessments in the Covid era.
Not long after we had gone to press, the FRC issued a further news release which confirmed audit firms have implemented additional measures to enhance their evaluation of companies’ Going Concern assessments since the start of the Covid-19 pandemic[1]. That was the good news.
The results of the review itself were carried on a separate linked document which identified that the review was on a sample of eleven audits which covered the seven largest UK audit firms. Some of this could be considered the not so good news!
"There was an inconsistent approach to testing the integrity of the Going Concern forecast models..."
This seems a somewhat heading euphemistic heading of Appendix 6 of the results of the review when one considers what is then revealed.
And bear in mind – these are a sample from the seven largest audit firms in the UK!
On one audit the integrity of the forecasting model was not adequately tested.
On another audit there was insufficient evidence of the testing of the forecasting model.
- On two further audits the audit procedures were limited to manual testing; the approach would have been enhanced by the use of automated spreadsheet (???) tools. (The question marks are mine!)
- In a section highlighted as “Good practice examples”
- Given the complexity of the models, some audits also used data analytical procedures, including Computer Aided Audit Techniques (“CAATs”), to test the integrity of the cash flow models….. on three audits, we found that the use of specific tools to check the mathematical and mechanical accuracy of the models highlighted matters such as circular references, formulaic anomalies and hidden cells/input fields.
- In some cases, the auditors had engaged specialists to assist in checking the integrity of the forecasting models.
Given the propensity for spreadsheet models to generate all sorts of flaws, many not at all obvious to management, let alone “circular references, formulaic anomalies or hidden cells/input fields” why does the FRC appear to be condoning the use of “spreadsheet tools” to prepare forecast for “Going Concern” assessments. Spreadsheets like Excel are wonderful tools - but are manifestly not for building reliable forecasts!
"Given the complexity of the models..."
The FRC’s own text says it all .
Good forecasts don’t have to be complex! To produce reliable forecasts, management should be employing purpose-built forecasting software based on robust double entry type architecture which produce four-way reports, forecast balance sheets, profit and loss accounts, cashflows and funds flow statements. With these forecast reports, all integrated and balanced, management – and the very relieved auditors – can concentrate on the important issues of whether the inputs are sound and sensible and concentrate on the outputs, generated in familiar accounting format, rather than worrying about formulaic anomalies and hidden cells and input fields! Or having to hire in specialists to check the integrity of the forecast models!
As stated above – good forecasts don’t have to be complex. Comprehensive yes, dealing with multi currencies, multi bank accounts, consolidations, just about any type of loan imaginable, fixed assets, auto-calculated depreciation, wages, PAYE, NI, Pensions, multiple stock and WIP calculations, invoice discounting, various capital structures, departments, cost & profit centres and gross profit percentages, Key Performance Indicators, What if scenario planning; these are the sorts of features available in a comprehensive forecasting package.
Why ever would any company or their auditors wish to waste manpower - and expose themselves to the wide and varied array of problems from multiple sources using Excel for their forecasts as highlighted in the European Spreadsheet Risks Interest Group website? Especially when there is purpose built reasonably priced forecasting software available?
Forecast 5 is just such a forecasting program. Developed in New Zealand to replace the very popular but now no-longer-supported and unstable Sage Winforecast, Forecast 5 delivers fast, accurate forecasts and with integration to Power Query for, e.g., covenant evaluation being added shortly, Forecast 5 is arguably the most suitable tool for developing Going Concern Assessment forecasts.
Take the next step and get a free 21-day trial, join us on an introductory webinar or get in touch for more information!
Sources:
https://cfo.economictimes.indiatimes.com/
