For listed companies, the combination of scrutiny and disclosure obligations potentially makes life very difficult

A retailer’s relationships with customers, landlords, suppliers, credit insurers and staff all rely on confidence.

For some, clean audited accounts are the foundation upon which confidence is built. As people are now discovering, getting this year’s accounts signed off may not be straightforward, with the key issue being that of going concern.

Often the first to get sued, auditors take their responsibilities very seriously. Until recently their position has been very clear: in order to sign off year-end accounts without modifying their opinion, an auditor would need to be satisfied that a business could trade for at least the next year.

To achieve this, auditors would review a company’s forecasts and marry them up with its banking arrangements to ensure there was sufficient, unconditional headroom throughout the review period. If there wasn’t, or a covenant waiver was required, or the facilities needed extending, then in the absence of such, the auditor would highlight the matter in their audit opinion (or, in circumstances, qualify it).

And while a modification to an auditor’s opinion should not necessarily be cause for alarm, it has become so, making the need to reach an accommodation with the banks even more important.

For listed companies, the matter can take on a greater urgency, with the combination of constant scrutiny and disclosure obligations potentially making life very uncomfortable. That’s why a number of listed companies find themselves with trashed share prices, even though many of them are trading relatively well.

While banks remain reluctant to provide the confirmations needed, the extent of the problem and the possibility of confidence being undermined on a grand scale has become recognised. Some companies have been lucky and dealt with the issue. Others are now trying to do so.

Most have been staggered to learn the basis on which their banks might be prepared to negotiate (although many won’t, or won’t yet), with previously unheard of terms being insisted on and reductions in maturity being sought.

The accounting profession has been looking for a solution to the black-or-white interpretation of the audit opinion. To ease pressure, the Financial Reporting Council has issued new guidance, whereby companies can provide more information on their future financing needs and highlight any material uncertainties regarding their ability to continue as a going concern.

The situation remains fluid, but these measures should help to deflect the glare from companies that are able to operate within the limits of their facilities, if the only difficulty is obtaining confirmation that they remain available. For those who are going to breach their covenants or will need greater facilities, the situation is still bleak.

While banks continue to ask for unprecedented terms for their debt, finance directors will feel very exposed. At Hawkpoint we can share some body warmth. Our debt advisory and restructuring teams have been helping clients with these issues for some months; unfortunately there will be no let-up next year.

Christopher Darlington is managing director of Hawkpoint