Going concern or concerned about going?
Big wigs from the big accountancy firms appeared on 23 November before the House of Lords Economic Affairs Committee. It was not a meeting of minds.
Their Lordships wanted to know about how accountancy firms had dealt with the issue of ‘going concern’ in forming their opinions on the banks’ financial statements ahead of the recent crisis. This may seem like an esoteric accountancy issue but it isn’t. The banks’ business models gave rise to what were in their accounts and landed each of us taxpayers with a hefty bill.
For us pro- and semi-pro auditors their Lordships’ inquiry into the performance of auditors in the run up to the crisis and the concentration of power in the UK audit market is spectacularly interesting.
The auditing profession is regulated by the Financial Reporting Council (FRC) which had some interesting things to say in its submission to the House of Lords’ Inquiry. In essence it said too few auditors were involved in the audit of the UK’s largest companies and this was unhealthy for all sorts of reasons. It also said this,
2.8 In considering behaviour and culture within the firms, the AIU [the FRC’s unit that audits the auditors on quality] has identified a number of instances of firms failing to apply sufficient professional scepticism in relation to key audit judgements. This lack of scepticism may manifest itself in a number of ways: over-reliance on management representations; failure to investigate conflicting explanations; failure to obtain appropriate third party confirmations; or seeking to obtain evidence that corroborates, rather than challenges, judgements made by client management.
Scepticism was at the heart of the questioning about ‘going concern’ by the Noble Lords. ‘Going concern’ is a cornerstone of financial reporting but all it means is that the business will continue trading for the forseeable future. Directors should regularly assess if their business is a going concern and financial statements should be prepared on that basis. Unless of course the answer to the assessment is that the business isn’t a going concern.
Accountancy Age reported what went on in the Lords’ Committee and it makes fascinating reading. Essentially any worries that auditors may have had about banks’ liquidity – a vital component of the idea of going concern – were allayed by conversations with government about the likelihood of support being available. The exchanges took me straight back to the FRC submission to the inquiry.
Why does any of this matter for us armchair auditors? I wrote before about the problems of reliable systems providing good data to support our work. I would also say that reliable robust audit opinions based on healthy scepticism – like I was taught as an audit nipper – on financial statements are a sine qua non.
Whether or not the changes in the shape of the audit market for the public sector in England will hep or hinder my profession in doing that work remains to be seen. What is clear is that armchair auditors, however good they may be, cannot do this work.