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UK companies are bracing for clashes with auditors next year as economic and political uncertainty increase the difficulty of signing off accounts and predicting the financial outlook.
Companies with December year-ends will prepare their annual accounts in the first quarter of 2023 against a backdrop of higher inflation, rising interest rates, supply chain disruptions and uncertainty over whether consumer spending will hold as the UK enters recession.
British companies’ bosses said the volatility was making it more difficult to guide markets on their future performance.
Auditors, who don’t want to be blamed for not raising red flags ahead of business failures during the recession, also warned companies to expect uncomfortable conversations about their financial outlook.
“Uncertainty is at an all-time high and, quite rightly, I think auditors are skeptical about management’s forecasts and whether they can be achieved against that backdrop,” said Andrew Walton, UK head of audit at EY. was “I think you’re going to see a lot of management challenge.”
Hamion Hudson, UK head of audit at PwC, said it was “the most difficult environment to audit”, adding that companies should expect a “higher level of scrutiny” in areas such as going concern, asset impairment, etc. Ability to meet bank loan agreements and access to finance.
The inability to accurately predict the year ahead has begun to appear in a large number of material uncertainty warnings in the worrying sections of financial results in recent months.
“It’s an uncertain environment with a lot of parts and no really good baseline or benchmark to guide against,” Hudson said. She added that dramatic changes in energy prices and borrowing costs meant that previous years’ figures were often of limited guidance.
Auditors’ attention to statements of concern is likely to increase further with the UK accounting regulator’s announcement in December that it will pay particular attention to this area in its next round of inspections.
Companies have already clashed with auditors over estimated cash flows and the availability and cost of debt facilities.
De La Rua’s auditor EY warned of “material uncertainty” about the company in November, citing a “serious but plausible downside scenario” where the banknote printer lost a key contract and breached an agreement on its credit facility.
De La Rue chief executive Clive Wachter told the Financial Times that “the board and management strongly disagree with this and believe it is based on an analysis that is neither plausible nor realistic”.
Shaun Wills, Superdry’s chief financial officer, said it was “incredibly disappointing” that the retailer had to flag “a material uncertainty” in its worrying October statement because of a “technicality” over the timing of the renegotiation date. The company will not need this facility until fall 2023, when it will purchase the next seasonal stock.
More FTSE-listed companies were forced to issue profit warnings in the third quarter than in any comparable period since the global financial crisis more than a decade ago, according to analysis by EY-Parthenon.
The chief executive of a FTSE 100 company said he was “very concerned” about the auditors’ approach to economic uncertainty, citing their increasingly pessimistic demands for “serious but plausible” results details.
Another chief executive said auditors had asked his company about “serious but plausible” scenarios in 18 months, meaning its 12-month revolving credit facility would be excluded from the analysis.
Geoff Rowley, chief executive of corporate restructuring and insolvency adviser FRP, said: “Forecasting is more challenging. . . It’s hard to see any certainty returning until we have a new one [UK] Government”.
“Auditors are becoming more cautious about what they’re signing off on,” he added, pointing to pressure on companies to secure debt and equity funding lines by 2023 to avoid concern warnings.
Some auditors said a series of economic challenges, driven in part by geopolitical issues such as the war in Ukraine, meant the next audit season compared to that during the Covid pandemic, when companies faced unprecedented uncertainty about their ability to continue trading.
“Furthermore . . . it’s more complicated when we go into Covid,” said Hudson at PwC.
“We also had assurances of government support at the time we had Covid,” Walton said at EY. “We don’t necessarily have that anymore. We don’t know what will happen with energy support for industry after March, supply chains are challenged, inflation is rising, the war in Ukraine continues.
However, companies are expected to be better prepared for stronger audits when the pandemic hits in 2020, and auditors said they are confident the problems will be resolved as long as discussions with management start early enough in the year.
“Companies generally have more experience of worrisome audit challenges in the wake of a pandemic,” said Paul Stephenson, Deloitte’s UK managing partner for audit and assurance.
“Many have adapted their cash management and forecasting processes and controls over the past few years. So companies should be better placed to meet auditors’ needs in this regard.”
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