This article was first published in the June 2020 UK edition of
Accounting and Business magazine.

Life would be so much simpler if judgments could always be black or white: if the going concern basis for accounting really did guarantee that a company would stay in business for the next 12 months, or an unqualified audit opinion provided absolute certainty that there was no material uncertainty.

Covid-19 has blown certainty out of the water, and there will be more modified audit opinions during the course of this year. This provides an opportunity for a more sophisticated view of a company’s accounts and of the value of an auditor’s opinion.

The least controversial case will be where the auditor cannot gather sufficient appropriate evidence on specific elements of the accounts, with the rest deemed ‘true and fair’. Limits on physical visits may, for instance, compromise checking on inventory.

Yet one of the silver linings of the crisis has been the rapid grasp of how to work remotely. In a podcast in April, Mark Babington, acting executive director of regulatory standards at the Financial Reporting Council, pointed to the potential to conduct videos of stock-takes and to gain evidence in other forms, such as validated copies of documents. Disclaimers, referring to a pervasive difficulty, should remain rare.

More sensitive will be whether the accounts are qualified because of a material mis-statement. This has been regarded as a nuclear option because of the uncompromising wording. But two things might make this judgment realistic without being damning. First is the level of uncertainty about much that will affect future cashflows, notably the economic environment. And second is that modern accounting has become increasingly forward-looking. A prime example is the requirement for banks to move from reporting incurred loan losses to calculating expected ones.

Both reasonable people and sophisticated models might disagree on forecast outcomes. But if users of company accounts are given enough information on the assumptions to make up their own minds, the outcome is a much more grown-up view of real economic life than the black-and-white version. The same should apply to going concern statements. Early adoption of the revised ISA 570 lists many ‘events or conditions’ that might cast doubt on going concern status.

Short of a modification, emphases of matter that draw attention to difficult measurements that are central to understanding the company could fulfil their potential at last. The auditor’s report, which identifies risks of material mis-statements, should become required reading for all users of accounts. The FRC’s consultation on the revised ISA 315, which emphasises understanding of the business environment, closed in April. It, too, should be adopted early.

Boards, auditors and their audiences need to learn to live with explanations of judgments that might prove wrong, rather than craving a return to a black-and-white world.

Jane Fuller is a fellow of CFA UK and serves on the Audit and Assurance Council of the Financial Reporting Council.