Irish companies hit by the Covid-19 crisis face the prospect of auditors issuing qualified opinions on their annual accounts and challenges to directors’ ability to judge whether their firms can remain in business as a going concern for at least 12 months.
The Irish Auditing and Accounting Supervisory Authority (Iaasa) has told auditing firms it expects existing accounting standards to be applied with no relaxation to take into account uncertainty thrown up by the coronavirus pandemic.
“It’s highly possible that we will see an increase in qualified audit opinions, and we expect a lot of disclosures in directors’ reports on the impact of Covid-19 on going concern,” Fergal O’Briain, head of finance and administration at the watchdog, told The Irish Times.
“Many accounting estimates use predictions about the future, which may be very uncertain at this time, and auditors simply won’t be able to form an opinion on them.”
Covid-19 restrictions have already served as a catalyst for a number of business collapses globally in the past month. Department store chain Debenhams Ireland, the Irish arms of fashion outlets Oasis and Warehouse, Meath-based building and plant hire business Brandon Plant Hire and the Usit travel group count among local names that have succumbed to liquidation.
Elsewhere, an interim examiner was appointed to airline CityJet last Friday to give it protection from its creditors as a survival plan is being drawn up. Lobby groups have warned that some restaurants and pub companies will never reopen as the Government sees the Irish economy contracting by 10.5 per cent this year.
"The retail, hospitality, tourism and aviation sectors are areas where Covid-19 has had a serious impact," said John Cleary, director of risk compliance and professional standards at Grant Thornton in Ireland. "Some industries and businesses will be able to bounce back quite quickly after restrictions are lifted. But most will find that while flicking the switch to turn off activity was one thing, it will not be as easy to flick the switch to turn things back on again as quickly."
Mr Cleary said there will be instances where audit opinions will be qualified, contain material uncertainty paragraphs or potentially require disclaimers of opinion. “There may even be cases where directors will not be able to prepare accounts on a going-concern basis, and will have to prepare them instead on a break-up basis,” Mr Cleary said.
Factors that must be considered regarding the going-concern issue will include companies’ financial reserves heading into the crisis, the extent to which they have been given credit by suppliers or banks, and their ability to negotiate continuing support from financiers and stakeholders, he said.
‘Assumptions and judgments’
“There is also additional emphasis now on looking not just at the short-term but at the medium and longer term and whether companies are realistically revising their underlying operating plans, including assumptions and judgments used in preparing their forecasting models,” he said.
Enda McDonagh, assurance leader at PwC Ireland, said that assessing the going concern issue in the current environment would require a lot more information from companies. "Careful judgment on the validity and basis of the information will be critically assessed. Consideration of the [effects of the] pandemic on customers, future revenues and realisation of receivables and other assets may be needed," he said.
On the plus side, companies have up to nine months to file accounts with the Companies Registration Office after the end of their financial year. "This will potentially provide time for the auditor to consider if sufficient and appropriate audit evidence can be obtained to support their independent audit opinion," said Mr Cleary.
Companies with shares or debt listed on the stock exchange have only four months to publish their annual reports.