“We’ve had a period of huge uncertainty, we’ve worked with other regulators to put in place guidance for companies, for their auditors and users of financial statements. We need to consider what the next steps are on that journey,” says Babington. “The one thing we have learned about the pandemic is that it is not static. It keeps developing and changing. What are the next challenges that we have to respond to?”

Speaking ahead of his keynote address at ICAEW’s Going concern and resilience: lessons learned from COVID-19 event, Babington stressed that companies and their auditors must not just think narrowly about going concern. “They need to think more broadly about what this means for the viability of businesses and how might they have to adjust, and what does that mean for those preparing their accounts and annual reports, and indeed what does it all mean for those auditing them,” he says.

“The critical challenge is quality of information provision and delivering it to financial markets in a way and at a time that supports decision making. It may be more difficult to get information to report on and obviously you’re reporting at a time of huge uncertainty, so being clear and transparent in disclosures helps to explain that context.”

High-quality and useful information 

Effective, transparent, high-quality information will support recovery, he says. However, restricted access to information during the pandemic and the huge uncertainty when signing off accounts makes that challenging to deliver.

“One of the things we have said – and this has been a key part of the FRC’s guidance – is that it is really important, because of the uncertainty, that companies disclose high-quality and useful information. The more a business can be clear and transparent about the impact of the pandemic on its business, how it expects to deal with that, what its options are, then that will help them,” says Babington.

He urges all parties to think in terms of ranges where specific numbers are elusive. “Part of the challenge is that, because of the uncertainty that businesses face it is much harder for them to say, ‘this is what is going to happen’. You might have run a series of forecasts or work out what the impact on your business might be but actually, that information might be sitting in a range,” he says.

It is much better and more meaningful to understand what that range is and to know, as a business, how you are going to respond to further changes or challenges. That is the real challenge for the profession – for preparers and auditors.

Babington puts it like this: “You have a business, you believe it to be viable, you’ve accessed government support schemes, you might have accessed loans. You need to be able to earn greater profits in the future to return to a normal trading situation or repay any loans taken. That’s going to create more questions and more difficulties to evaluate, which is going to lead to further conversations between companies and their auditors. The recovery will likely span a number of accounting periods.”

‘Genuinely new’ scenarios

Parallels with the financial crisis are not wildly helpful – this crisis is far more pervasive, covering lots of sectors, he says. “It’s not as if we’ve got anything we can look back to,” says Babington. “We’re having to develop scenarios that are genuinely new.”

Commenting on going concern, he points out that near-sightedness just will not do. “Although there is an obligation on the directors of companies to look forward, and to ask whether this is a viable business next year, the auditors will also be asking about whether there are events or conditions that suggest problems over a longer period than one year. They will say: ‘what assessment have the directors made, do we agree with their assessment and do we agree with the evidence they have in support of it?’”

Babington comments that perhaps we have become a little too focused on 365 days. “You can’t ignore broader factors that are going to have an impact on that business in the long term,” he insists.

Babington will be delivering the keynote address at ‘Going concern and resilience: lessons learned from COVID-19’ event, hosted by ICAEW’s Audit and Assurance and Financial Reporting faculties on 30 October. This event will help members navigate reporting in the light of COVID-19. As Babington points out, a wide range of companies, not just companies of specific sizes in particular sectors, are struggling. For more information or to register, click here.

The event takes place against a backdrop of consultation and, indeed, the potential for change over the longer term. The FRC has now issued its consultation paper, ‘A matter of principles: the future of corporate reporting’ in which it acknowledges that businesses have had to focus on cash and liquidity in recent months “with an understandable focus on short-term survival”, but for the longer term, the FRC’s discussion paper is a first step in considering the development of a principles-based framework for corporate reporting in the future.