convialsa.org

Accountancy SA, Apr 2009

GOING CONCERN UNCERTAINTIES ARE EXPECTED TO AFFECT 2008 AUDITED FINANCIAL STATEMENTS

Due to the current economic environment, it is expected that a significantly higher proportion of 2008 year end annual reports are likely to contain disclosures relating to going concern and liquidity, together with an increase in the number of modified audit reports, as compared to previous years. The nature of the market reaction, and the full market implications of a rise in these disclosures and modified audit opinions, will be heavily affected by the levels of understanding and awareness regarding the cause of this likely rise. If investors and others do not respond appropriately to “emphasis of matter” paragraphs explaining going concern uncertainty, and do not take into account the current exceptional economic circumstances, the issue has the potential to undermine wider business confidence.

Market participants need to be fully aware of what emphasis of matter paragraphs mean in the current business environment.

In many cases, the damaging potential reactions to modified audit opinions may be caused by misinterpretations of the ‘emphasis of matter’ in those modified audit opinions – and, as such, may be avoidable given sufficient market understanding and awareness.

Where a material uncertainty exists, which leads to significant doubt about a company’s ability to continue as a going concern, the auditor has the following choices:

Where the directors have concluded that the going concern basis is appropriate:

* Where the uncertainty has been adequately disclosed in the financial statements, the auditor will issue an unqualified opinion, modified by including an emphasis of matter paragraph. If there are significant multiple other material uncertainties, auditors may disclaim their opinion instead of adding an emphasis of matter paragraph.

* Where the uncertainty has not been adequately disclosed in the financial statements, the auditor will issue a qualified opinion, stating the reasons why, or give an adverse opinion.

Where the directors have concluded that the going concern basis is not appropriate:

* Where the directors have followed an alternative basis, with which the auditor agrees, and have provided adequate disclosure in the financial statements, the auditor can issue an unmodified report (in relation to going concern). Such situations are rare. An audit opinion that does not refer to going concern is not a guarantee that a business is a going concern.

The UK Financial Reporting Council (FRC), in its press statement of 27 November 2008, says that it ‘recognises that the global liquidity squeeze and its impact on the wider economy increases the challenges for directors in preparing corporate reports this year… more time may need to be spent by directors and audit committees planning the year end activities, reviewing key assumptions and models used in financial reporting and in reviewing the significant accounting and disclosure judgments. The FRC has therefore published an Update for directors of listed companies on reporting on going concern and liquidity risk. The publication can be downloaded from the FRC website: www.frc.org.uk/press/pub1781.html.

EXCHANGE CONTROL CIRCULARS

The Exchange Control department of the South African Reserve Bank (EXCON) has issued Exchange Control Circular No. 01/2009 – Annual withdrawal and retention of Circulars.

Authorised Dealers are referred to Exchange Control Circular No. 1/2005 dated 2005-07-15 and advised that, with the exception of the Circulars mentioned below, all other Circulars are hereby withdrawn. See table 1 above