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Going concern: an epic fail

Flat balloon spectacular going concern failings

By Ian Lavis on behalf of Praxity Global Alliance


A series of spectacular going concern failings has led to tougher requirements for auditors and calls for wide-ranging reforms to the profession, but is it enough to restore confidence?

Massive corporate collapses in the UK such as Carillion and BHS have rocked the accounting profession and exposed fundamental flaws in the approach to ‘going concern’ – the assumption that a company has the resources to continue operating.

The latest spate of corporate meltdowns led to the Financial Reporting Council (FRC) strengthening the international audit standard (UK) for going concern.

However, an independent report by Sir Donald Brydon, former chair of London Stock Exchange and current chair of Sage Group, calls for much stronger action to restore shareholder and public confidence in the profession, and to address going concern failings.


Fundamental shift in approach

Backed by the UK government, the independent report calls for “a fundamental shift in definition and approach to ensure that all appropriate opportunities are taken for the auditor to inform as well as to confirm and verify”.

The Brydon report identifies the need for a more robust and transparent audit framework and calls for the replacement of true and fair with a greater focus on going concern.  It also contains radical proposals for the inclusion of fraud analysis in the audit remit.

While aimed at the UK, the report has far-reaching implications for the audit profession worldwide.  It has reignited the controversy over the approach to going concern and drawn into question the role of auditors as traditional red flag wavers or industry watchdogs and consultants.

David Herbinet, global head of audit at Mazars, says the problem auditors have is how and when to raise the red flag in a way that enables stakeholders to make sound business decisions.

He points out: “In a capitalist economy, it’s normal and sound that businesses should fail, so the point is not to stop corporate failures. However, there are businesses that can be rescued if problems are identified early enough.”

This is where things can go wrong. “Investors and creditors are sometimes ill-informed of certain financial strains and cannot disengage early enough,” David says, adding: “Essentially, the main issue is one of timing, and availability of relevant information to make sound business decisions.”

Accountant and Sheriff of the City of London, Professor Michael Mainelli, who has been calling for changes to the audit and accounting profession for many years, says the whole concept of going concern “is not well thought through”. He believes: “Going concern ought to be expressed as the probability of defaulting over a period of time. It’s about the ability to gauge the quality of an audit.”

This is the approach put forward by the Long Finance Initiative, founded by Professor Mainelli, in a report entitled Confidence Accounting. The report advocates the use of “distributions, rather than discrete values”, where appropriate to create “a fairer representation of financial results, reduced footnotes, more measurable audit quality and a mitigation of mark-to-market perturbations”.


Failings across the board

The need to reform the approach to going concern was highlighted by the dramatic corporate collapse of UK-based construction group Carillion, one of several high-profile corporate failures in the UK.

The company was described as a going concern when, out of the blue, it went into liquidation in January 2018 with liabilities of nearly £7bn and just £29m in cash. The collapse resulted in lost jobs, savings, pensions and tax revenues.

Audit investigations by the FRC and other regulators are continuing but a report following an inquiry into Carillion’s demise threw up a hornet’s nest of government, corporate management and audit failings.

The inquiry report summary, by the UK parliament committees for work and pensions, and business, energy and industrial strategy (BEIS), described Carillion’s collapse as “a story of recklessness, hubris and greed”.

The parliament committees slammed the board as “responsible and culpable for the company’s failure”. They attacked auditors for “complacently signing off the directors’ increasingly fantastical figures” and accused the Financial Reporting Council (FRC) of “toothlessness”. Indeed, the UK government has pledged to replace the FRC by a new regulator with stronger powers.

Commenting on the difficulties auditors face when dealing with company directors, David Herbinet says: “It has been said, sometimes with reason, that auditors have allowed companies to not provide complete information on their financial difficulties. In some cases, it’s because auditors are concerned, sometimes with reason, that flagging issues at too early a stage could precipitate financial difficulties such as banks pulling out and suppliers halting supplies. In other cases, it’s because auditors have not identified material risks that could cause a business to fail and have not reported on these.”


Going concern risks

In response to calls for a major overhaul of the statutory audit market and the regulatory regime, the FRC strengthened its ISA UK 570 Going Concern standard last year, requiring auditors to be more robust and transparent, and highlighting the need for improved international standards.

However, concerns have been expressed over the nature of the FRC response, and in particular, the risks associated with going concern.

The Institute of Chartered Accountants in England and Wales (ICAEW), while welcoming audit reform and the focus FRC focus on going concern, issued a statement prior to the revision to ISA UK 570 declaring:

“The causes of recent corporate collapses are complex and it is not yet clear that the failures by auditors to highlight them in advance were due to flaws in auditing standards or an audit delivery gap. We call for the FRC to undertake a root cause analysis on the failures to alert.”

The ICAEW also expressed dissatisfaction with the proposal for auditors to be required to provide additional going concern disclosures in all cases, adding: “This is likely to increase costs and introduce a significant amount of boilerplate in audit reports which risk obscuring, rather than highlighting going concern risks.”


What now?

So, is Sir Donald Brydon’s report a step in the right direction for companies and auditors alike?

David Herbinet welcomes what he terms as “better consideration of solvency position by companies” and he supports “a new Resilience Statement to set out the short, medium and long-term viability of a company”.

However, while he agrees there needs to be “more inquisitive assessment” of this statement by auditors, he says the main issue is “spotting risk early”, which he claims is more an issue for counter fraud teams than for forensic teams.

One solution that could be implemented right now, he says, is the “duty of alert” for auditors to report viability or other serious concerns to the regulator. This duty was put forward by Sir John Kingman at the end of 2018 in his report calling for the FRC to be replaced.

David explains: “Today, UK auditors can only report concerns over viability in their annual report which is months after the year end and potentially many more months after the first signs of solvency issues. Kingman proposes that auditors should have a duty to alert the regulator should they identify going concern issues in the course of their work. This would bring issues to the table much sooner than is the case now and enable stakeholders to work together to agree a rescue plan much earlier. This would increase likelihood of success or kill the business if no such rescue can be envisaged, which would provide better protection to stakeholders. This is in my view a very key recommendation, which exists in a number of other countries, and it should be implemented without delay.”

It is clear there are several areas of audit that require addressing to restore confidence, some more pressing than others, but corporate managers have a key role to play in being far more transparent and providing information in timely manner so that auditors can do their jobs effectively.


Sir Donald Brydon’s report, entitled Assess, Assure and Inform: Improving Audit Quality and Effectiveness, is wide ranging.

Its recommendations encompass:

  • A redefinition of audit and its purpose;
  • The creation of a corporate auditing profession governed by principles;
  • The introduction of suspicion into the qualities of auditing;
  • The extension of the concept of auditing to areas beyond financial statements;
  • Mechanisms to encourage greater engagement of shareholders with audit and auditors;
  • A change to the language of the opinion given by auditors;
  • The introduction of a corporate Audit and Assurance Policy, a Resilience Statement and a Public Interest Statement;
  • Suggestions to inform the work of the BEIS on internal controls and improve clarity on capital maintenance;
  • Greater clarity around the role of the audit committee;
  • A package of measures around fraud detection and prevention;
  • Improved auditor communication and transparency;
  • Obligations to acknowledge external signals of concern;
  • Extension of audit to new areas including Alternative Performance Measures;
  • The increased use of technology.


To view the Brydon report in full, please visit:


For ISA (UK) 570 Going Concern, please visit:


For details on Confidence in Accounting, please visit: