Written by Johnny Kipps
Right at the top of the King’s Speech(1) on 17 July, 2024 in only the third paragraph King Charles noted “Bills will be brought forward to strengthen audit and corporate governance, [Draft Audit Reform and Corporate Governance Bill]."
Known as ARGA, this bill has been a long time coming as this helpful timeline below indicates:
Photo credit : Hugo Burn and Royal Household
(2)
During this period, at Forecast 5 we have also been writing that things need to change, especially as regards the Going Concern Assessment.
[Explainer: “The accounting concept of going concern is based on the assumption that an entity will continue to operate into the foreseeable future. Accounting standards set a high threshold for departing from the going concern basis. An entity is a going concern unless management either intends to liquidate the entity or cease trading or has no realistic alternative but to do so”](3)
Fundamental to the Going Concern Assessment is a reliable, easily auditable and accurate forecast. But as noted in the first of our articles referred above:
"There are no set procedures for preparing a Going Concern Assessment.”
The ICAEW(5) outlines the key issues to consider, when preparing a Going Concern Assessment, the first of which is Forecasting:
The forecast should:
- reflect the current economic environment and recent post balance sheet activity;
- be reviewed and updated regularly until the financial statements are authorised for issue;
- include reasonable and supportable judgements:
- run more “what if” scenarios than normal, taking account of wider economic and sector specific considerations:
- possibly run reverse stress testing – which events, or combinations of events - would it take for the entity to fail and what can be done to mitigate this risk.
But when the FRC reviewed the production of various Going Concern Assessments it found:
"There was an inconsistent approach to testing the integrity of the Going Concern forecast models..."(6)
This was clearly exposed in the Carillion investigation(7) where the Regulator found
"In particular, … work in respect of Going Concern and Carillion’s financial position generally was seriously deficient. KPMG …. failed to respond to numerous indicators that Carillion’s core operation was loss making and that it was reliant on short term and unsustainable measures to support its cashflow."
Whilst its not specifically stated Carilion’s Going Concern Assessments were almost certainly prepared using spreadsheets, a tool of which the ICAEW had this to say(8):
- spreadsheets are notoriously error-prone; and
- A spreadsheet of any magnitude can be daunting to review, with perhaps thousands of formulas (sic).
As Nassim Taleb(9) said: “You're worse off relying on misleading information than on not having any information at all. If you give a pilot an altimeter that is sometimes defective, he will crash the plane. Give him nothing and he will look out the window. Technology is only safe if it is flawless”.
Our view on the Going Concern Assessment preparation is this:
- The Going Concern Assessment requires a comprehensive, fast and flexible forecasting package with a proven track record rather than a spreadsheet model with all its time-consuming formulae issues and balancing problems.
- Forecast 5 can quickly run multiple multi-layer “What if” stress test scenarios, forecast cashflow and balance sheet analyses from which working capital and fixed capital sufficiency – or shortfalls – can be determined, provide the base for all the debt covenant calculations and maintain within each run of the forecast the supporting Assumptions and Judgements.
For the public good ARGA can’t come quickly enough – provided if it lays solid provisions for the Going Concern Assessment which mandate the underlying forecasts are to be prepared with tools designed specifically for forecasting; like Forecast 5.
If you’d like to try Forecast 5’s impressive range of features and give a boost to national productivity, check out our options below:
(1) https://www.gov.uk/government/speeches/the-kings-speech-2024
(2) https://www.addleshawgoddard.com/en/specialisms/corporate/governance-and-compliance/arga-new-regulator-new-power-over-accountants-auditors-directors/
(3) https://www.icaew.com/technical/corporate-reporting/uk-gaap/uk-gaap-faqs/going-concern-considerations-a-guide-for-preparers
(4) https://www.charteredone.co.uk/issues/#flipbook-1299/23/
(5) https://www.icaew.com/technical/corporate-reporting/uk-gaap/uk-gaap-faqs/going-concern-considerations-a-guide-for-preparers
(6) https://www.icaew.com/technical/corporate-reporting/uk-gaap/uk-gaap-faqs/going-concern-considerations-a-guide-for-preparers
(7) https://www.frc.org.uk/news-and-events/news/2023/10/sanctions-against-kpmg-llp-kpmg-audit-plc-and-two-former-partners/
(8) https://www.icaew.com/insights/insights-archive/cashflow-modelling-good-spreadsheet-practice
(9) https://merage.uci.edu/~jorion/oc/ntaleb.htm
