Going concern is the assumption that a business will continue operating for at least 12 months from the reporting date. When that assumption is in doubt, the auditor must comment, and the financial statements need disclosure or modification.
What you'll learn
→ What auditors look at → Indicators of going concern doubt → Disclosure or modification → How to manage the conversationWhat auditors look at
Cash position, runway, banking facilities, debt covenants, working capital, lease commitments, contractual obligations, regulatory pressures, and management's plans to address any shortfall. The 12-month forward view is what matters, not just the historical position.
Auditors typically request a cashflow forecast from year-end through 12 months out, with the assumptions documented. They stress-test the forecast against downside scenarios. If the forecast shows zero cash within the period, going concern is impaired.
Indicators of going concern doubt
Negative operating cashflow, recurring losses, working capital deficit, breach of debt covenants, supplier credit terms shortened or withdrawn, key customer loss, regulatory action, loss of key personnel, any of these can indicate going concern issues.
Two or three indicators together usually trigger a deeper review. Single indicators may be addressable; multiple indicators converging suggest fundamental issues that need management response.
Disclosure or modification
Three outcomes: the auditor concludes going concern is appropriate (no disclosure needed); the auditor concludes there is material uncertainty (disclosure required in the financial statements); or the auditor concludes going concern is no longer appropriate (the financials should be restated on a break-up basis).
Material uncertainty disclosure requires a paragraph in the financial statements describing the conditions, the events, and management's plan to mitigate. The audit report includes a 'Material Uncertainty Related to Going Concern' paragraph that highlights the disclosure.
How to manage the conversation
Engage early with your auditor on going concern, do not wait until the audit close meeting. Share your cashflow forecast, your fundraising plans, your facility renewal status. The earlier you address concerns, the more time you have to mitigate.
Document everything: shareholder support letters, loan facility commitments, customer renewal evidence. Auditors rely on documentation to support their going concern conclusion. Verbal assurances are not enough.
This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.