Going Concern Assessment FAQs

A going concern assessment isn't just another compliance checkbox—it's a critical evaluation that determines whether your business can continue operating for the next 12 months. This assessment affects everything from investor confidence to loan agreements, making it essential for every business owner to understand.

Let's break down what you need to know about conducting a thorough going concern assessment and how it impacts your financial reporting.

What Management Must Do

Your management team carries the primary responsibility for evaluating whether substantial doubt exists about your company's ability to continue as a going concern. This assessment must cover the 12-month period following your financial statement issuance date.

The key is documentation. Your auditors will scrutinize every aspect of your assessment, so maintain detailed records of your evaluation process, including the factors you considered and the conclusions you reached. This documentation serves as your defense when auditors come knocking.

Remember, this isn't a one-time exercise. Market conditions change, unexpected challenges arise, and new opportunities emerge. Your going concern assessment should reflect your current reality, not outdated assumptions.

Red Flags That Signal Trouble

Several warning signs should trigger immediate attention during your going concern assessment:

Financial indicators often provide the clearest signals. Recurring operating losses, negative cash flows from operations, and working capital deficiencies all point to potential problems. If your company consistently spends more than it earns, that's a red flag worth investigating.

Operational challenges can be equally telling. Loss of key personnel, major customers, or critical suppliers can destabilize your business model. Similarly, if you're facing significant regulatory changes or losing market share to competitors, these factors deserve serious consideration.

Legal and financial obligations present another category of concern. Loan defaults, debt covenant violations, or pending litigation can threaten your company's continuity. Asset disposals, especially when they involve core business operations, may indicate underlying financial stress.

The presence of these red flags doesn't automatically mean your business can't continue. However, they do require honest evaluation and, often, concrete mitigation strategies.

Developing Effective Mitigation Plans

When your going concern assessment reveals potential issues, mitigation plans become crucial. These strategies demonstrate to stakeholders that management recognizes the challenges and has actionable solutions.

Financial strategies might include raising additional equity capital, securing new financing arrangements, or restructuring existing debt. Each option has implications for ownership, cash flow, and future flexibility, so consider them carefully.

Operational improvements can address underlying performance issues. Cost reduction programs, asset sales, or business model pivots might restore profitability and cash generation. The key is ensuring these changes are realistic and achievable within your timeline.

Your mitigation plans must be specific, measurable, and supported by evidence. Vague promises to "improve performance" won't satisfy auditors or stakeholders. Instead, provide detailed timelines, responsible parties, and success metrics.

Understanding Auditor Requirements

Auditors bring an independent perspective to your going concern assessment. They'll evaluate your methodology, test your assumptions, and review the adequacy of your financial statement disclosures.

If your auditors agree with your assessment and find your disclosures adequate, they'll typically issue an unmodified opinion with an emphasis-of-matter paragraph. This approach highlights the going concern uncertainty without questioning the appropriateness of using the going concern basis of accounting.

However, inadequate disclosure or disagreement with management's assessment can lead to qualified or adverse opinions. These outcomes can damage stakeholder confidence and complicate future financing efforts.

Prepare for auditor scrutiny by maintaining comprehensive documentation, supporting your assumptions with credible evidence, and ensuring your financial statement disclosures clearly communicate the nature and magnitude of any going concern uncertainties.

Your Path Forward

A well-executed going concern assessment protects your stakeholders and ensures transparency in financial reporting. It's not about avoiding difficult conversations—it's about having them early and honestly.

Start by gathering your financial data and identifying any warning signs. Develop realistic mitigation strategies for any issues you discover. Most importantly, document everything thoroughly and communicate clearly with all stakeholders about your findings and plans.

Ready to navigate these complex requirements with confidence? Our experienced team understands the nuances of going concern assessments and can guide you through the process while helping you prepare for auditor scrutiny. Let's work together to ensure your financial reporting meets the highest standards of transparency and accuracy.