Growing concern over rise in 'going concern' notices

With the economy teetering on the edge of recession and Insolvency Service figures recording a 25% rise in the number of companies filing for bankruptcy, it is likely that BDO Stoy Hayward’s recent ‘going concern’ warning over Sofa Workshop will be just one of many.

A Deloitte report has revealed that going concern warnings that a company may not be able to continue trading appeared in the audit reports of 5% of listed companies for the 2007/08 year. That figure is expected to rise for companies with December year-ends.

Going concern notices scare investors and suppliers, but accountants and company directors are required to highlight nay possibility that the company may not be trading in 12 months time.

The Financial Reporting Council is currently reviewing the issue of going concern notices and is expected to issue new guidance to auditors and company directors within the next month.

The corporate reporting watchdog is concerned that companies will start issuing ‘boiler plate’
paragraphs which warn of exposure to economic conditions, but give little detail on a firm’s distinct circumstances.

‘They have to write about their specific conditions, not a general paragraph,’ says the FRC.

Steve Maslin, head of external and professional affairs at Grant Thornton, says the full effect of the credit crisis is only just beginning to kick in and that more company directors will need to make disclosures about things that impact the future funding of their business than has been the case in recent years.

‘I can’t think at the moment of a company that wouldn’t need to provide a greater level of detail because even if a company has cash in the bank, we’ve been going through a period when you haven’t even been sure that that money is safe,’ he says.

Cash in the bank is one problem, but it is getting cash from the bank that’s worrying most businesses. Many will face problems when their overdraft facility comes up for renewal as banks may be unwilling or unable to offer the same line of credit as they have in the past.

PricewaterhouseCoopers director Geoff Swales reckons that the majority of going concern warnings will come from companies that depend on bank financing.

‘Banks aren’t even willing to lend to each other at the moment,’ he says, ‘It’s a vicious circle that needs to be broken.’