Auditors warned as insolvencies rise

The UK is yet to see business insolvencies peak according to a senior regulator who is urging caution when auditors warn about future risks.

Ian Wright, director of corporate reporting at the Financial Reporting Council (FRC), expects to see insolvencies peak in 12 months and is asking auditors to think hard about issuing going concern warnings, given out when there are fears about a company’s prospects of surviving over the next 12 months.

Last week, the FRC released new guidance, emphasising the importance of “balanced, proportionate and clear disclosures” about going concern issues. The guidance is aimed at addressing a looming spike in insolvencies.

“Historical patterns are that insolvencies rise at the tail end of the recession,” Wright said.

“As businesses come out the other side of the recession they need working capital, they need an overdraft for a fix-term loan. It’s at these moments that they run out of temporary cash and that’s when they need to look to the banks to get over the hump of restocking.”

Wright’s view was backed by insolvency specialists Begbies Traynor which said: “There is every reason to suggest that the unemployment and insolvency peaks of this recession remain some way off.”

Wright has seen going concern warnings rise from between 500 to 600 a month to 1,100 to 1,200. He expects this to increase. He is also concerned some weak businesses, headed for insolvency, may slip under an auditor’s radar.

Wright said recessions often burn through the economic landscape leaving only the strongest businesses standing, while the weak ones fall.

“One of the benefits of the recession is that it rings out inefficiencies,” he said.
“It’s normal to see that, but clearly we only want businesses [to go insolvent if] it can’t survive and has no realistic prospects of surviving,” he said.

He believes auditors have a “delicate balancing act” when deciding whether to issue a going concern warning.