Apparently, and according to research from a couple of Big Four firms, the feared avalanche of ’emphasis of matter’ paragraphs – statements that are just a step away from ‘going concern’ statements – have not materialised.
There were real concerns that in an effort to protect themselves, and because of the economic conditions, auditors would feel the need to include the paragraphs in annual reports in volumes that have never been witnessed before.
You have to wonder why they haven’t materialised. Firstly, the Financial Reporting Council put out guidance specifically to head off such a deluge. This made it clear that there was no need to rush head-long into emphasis of matter statements. In effect not only did the FRC give auditors a warning, but it also gave FDs the very ammunition they needed to argue with the auditors if emphasis of matter became an issue. We know for a fact the FRC was very grateful for the coverage.
Once the guidance was out though, the press picked up on that advice and made it very very public. That must have added to the pressure on auditors indeed it appeared to place the burden of responsibility firmly on the shoulders of auditors. Whether it went too far is an issue for debate. Directors have to carry some responsibility for their performance and the management of the company.
Of course, the research is restricted to large companies. And when working with particularly large clients it is always very sensitive to call them out on going concern anyway issues.
Add all these factors together and you have very little room for auditors to manoeuvre.
For the big clients. What would be interesting to know is what is happening to all the much smaller clients, or those that don’t have the issue of being publicly listed. Auditors may feel less less pressure there. Their emphasis of matter/going concern calls may just sway the other way much more frequently. Would that be fair? Well, there’s a tough question to answer in the midst of a crisis.
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