Insights

Management Framework for Companies to Assess Ability to Grow

Amid the economic turmoil that has been brought about by the coronavirus pandemic, going concern is a big topic for companies, particularly as it relates to audits and accounting.

Your company needs to evaluate whether the downturn of the economy from this pandemic has impacted its ability to continue as a going concern. 

Management should be tasked with developing a plan to offset the impact of the conditions and events that risk your company’s liquidity. Lean leadership will be a key component of any strategy going forward. Depending on your specific set of circumstances, certain disclosures may need to be included in interim and annual financial statements, even if you intend to remain liquid for a year or more. 

Today’s substantial economic uncertainty has far-reaching implications for most businesses,  including challenging operational and financial reporting issues. As a result, ensuring market confidence in your financial statements and disclosures is critical at this juncture – even when your management believes there is no substantial doubt about the company’s ability to continue as a going concern. You need access to the necessary information in order to understand your risks and liquidity.

Therefore, it’s important to be able to identify and respond to liquidity risks if you are to be able to assess business continuity properly.

Management Framework Tips

There are certain steps you will need to take to be able to assess your ability to grow and thrive in this climate. Here are four main ones to heed. 

1. Identify risks that relate to liquidity

At each annual and interim reporting period, management must evaluate conditions or events that raise doubt about the company’s ability to continue as a going concern within one year of the issuance of financial statements. They have to consider conditions that are “known and reasonably knowable,” taking into account the most current information available at the time.

When relevant conditions and events point to the improbability that the company can meet those obligations within that time frame, substantial doubt about a going concern arises. You may have to assess a multitude of risk indicators and scenarios in order to effectively assess the list of potential impacts on liquidity and adequacy of disclosures.

2. Come up with a plan

Next, you have to consider whether the plans designed to mitigate relevant conditions or events will indeed alleviate the substantial doubt. Your senior management will have to create a plan to offset the risk of anything that puts the company’s liquidity at risk, taking into account the current environment and even looking ahead to raising more capital, cutting costs or liquidating non-essential assets.

3. Make disclosures

Next, you should disclose information that allows users of the financial statements to understand the outcomes of the above two steps. If substantial doubt still cannot be alleviated, you should include a statement about the substantial doubt and add disclosures to the footnotes about any risks and uncertainties that may greatly impact financial statement amounts in the short-term. 

Additionally, you have to determine whether disclosures pertaining to COVID-19 are warranted, taking into account the severity of the situation and including company-specific factors. Timely disclosure, given the current economic climate, is of course necessary.

4. Understand the impact

As you are aware,  COVID-19 could very well have implications on the auditor’s report, resulting in circumstances where an additional paragraph will have to be included in the auditor’s report. That may either be a required paragraph (saying that there is indeed substantial doubt about the company’s ability to continue as a going concern) or voluntary paragraph (saying there is no substantial doubt about the company’s ability to continue as a going concern).

In conclusion, ongoing and timely communication among the auditor and management should be focused on the impact of COVID-19 as it pertains to critical judgments, uncertainties, and assumptions, including those impacting liquidity or going concern. The continually evolving landscape, predicated by potential disruption and complexities, demand such timely and ongoing attention.

Contact Incito Consulting Group

To learn more about Incito’s suggestion for management frameworks, growth analysis and lean leadership, please contact us at 866-697-LEAN or send us a message online.

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