As global markets face growing uncertainty, the issue of going concern in financial statements has never been more crucial for businesses – especially those operating across the UK-US corridor. The revisions to ISA 570 (Revised) heightened the standards for auditors, demanding more rigorous assessment, transparency, and early risk detection. The profound shifts in both the political and economic landscapes of the UK and the US make the application of ISA 570 (Revised) even more challenging.

In the UK, the rise of the Labour government in 2024 has introduced a wave of green energy policies, regulatory reforms, and public spending initiatives. These initiatives, while focused on sustainability, are creating significant cost pressures and operational disruptions, particularly in sectors like energy, real estate, and manufacturing. As highlighted in the July 2024 PwC UK Economic Outlook, projected GDP growth of around 1% and stabilizing inflation are positives, but tighter regulations may challenge companies’ ability to remain competitive and solvent in the long term.

It’s a complex and challenging time for businesses, and it’s important to acknowledge the difficulties they are facing. In the US, businesses are grappling with inflationary pressures, rising interest rates, and ongoing supply chain disruptions. Cross-border businesses are thus navigating a dual challenge: regulatory reform in the UK and macroeconomic volatility in the US. These factors are creating a more complex environment for auditors tasked with evaluating companies’ ability to continue as going concerns.

For companies operating in the UK and the US, the combination of regulatory shifts in the UK and macroeconomic challenges in the US poses significant risks to their going concern status. The Labour government’s focus on green energy reforms and taxation further complicates business operations, particularly for heavily regulated sectors. Meanwhile, the US’s rising interest rates and inflationary pressures heighten financial risks. This situation necessitates a meticulous evaluation of cross-border supply chains, investment strategies, and tax liabilities to ensure companies’ going concern status.

Implications of ISA 570 (Revised)

The ISA 570 (Revised) is designed to enhance the rigor with which auditors assess going concern. Key areas include:

1. Increased Auditor Responsibility: Auditors are required to conduct more thorough assessments of management’s going concern evaluations, reviewing assumptions about future cash flows, financial performance, and economic conditions. This heightened scrutiny aims to detect potential insolvency risks earlier.
2. Enhanced Transparency and Communication: The standard mandates that auditors clearly communicate and document any material uncertainties about the company’s going concern status. This ensures stakeholders are fully informed of potential risks.
3. Use of Robust Financial Analysis: The revised standard calls for more comprehensive financial analysis, including stress testing against external pressures such as regulatory shifts or industry downturns. Auditors must consider how changes in both the UK and the US might impact the company’s financial projections.

Practical Steps for Auditors

To effectively navigate ISA 570 and the evolving economic environment, auditors need a structured approach to going concern assessments:

1. Initial Risk Assessment: Evaluate the company’s financial health by reviewing management forecasts and identifying key risks related to regulatory changes, market volatility, and macroeconomic factors such as inflation and interest rates.
2. Conduct Stress Testing: Simulate various economic scenarios, taking into account both UK and US regulatory environments. Consider how policy changes, like Labour’s green energy initiatives or US interest rate hikes, could affect the company’s revenue and costs.
3. Assess Cross-Border Impacts: For businesses operating in the UK-US corridor, assess how fluctuations in foreign exchange rates, changes in trade regulations, and cross-border tax structures impact financial viability.
4. Collaborate with Management: Engage in detailed discussions with management to understand their perspective on the company’s going concern status. Request documentation on how they plan to mitigate financial risks, whether through restructuring, cost-cutting, or raising capital.
5. Evaluate External Pressures: Incorporate broader political and economic trends into the going concern analysis, factoring in the impact of Labour’s regulatory reforms and US macroeconomic conditions on the company’s operations.
6. Document and Report: Ensure that all material uncertainties are clearly documented in the audit report. Use transparent language to explain how external factors, such as economic policies or market conditions, contribute to the company’s going concern risks.
7. Continuous Monitoring: Going concern assessments should not be one-time exercises. As political and economic circumstances evolve, auditors must continuously monitor and reassess risks, ensuring companies remain compliant with the updated ISA 570, AU-C Section 570, ASC 205-40, and IAS 1.

Conclusion

The ISA 570 (Revised) introduced a more rigorous framework for going concern assessments, emphasizing early detection of risks, transparency, and comprehensive reporting. In times of significant political and economic upheaval, especially for companies operating within the UK-US corridor, maintaining compliance with the going concern standard can be particularly challenging. For assurance providers, navigating this complex environment requires an integrated, forward-looking approach to assess both local and international risks.

The role of auditors is more critical than ever in helping businesses adapt to these challenges, providing them with clear, actionable insights to maintain their financial stability. Through rigorous analysis and proactive engagement, they can ensure that businesses are better prepared to navigate the uncertainties of today’s economic and political landscape.