Future of Audit – “The inevitable and ongoing concern about going concern”

Since 2020 the world has changed dramatically. The COVID-19 pandemic has a huge impact on companies and also auditors had to adjust to the new circumstances. On site/offline audits shifted rapidly into off site/online audits. Auditors had to rely heavily on technology in communication, but also in performing audit work, like inventory observations and stock counts, using more advanced technology, such as drones. And even though technology driven audits are coming more to the surface, the main concern for the upcoming years will be the going concern assumption as used in the preparation of the financial statements.

Going concern basis of accounting and the role of the auditor

Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.

Technical developments in The Netherlands

In The Netherlands, the Steering Group in the Public Interest (Stuurgroep Publiek Belang: SGPB) was established to give a further impulse to the sustainable quality improvement of the audit. One of its tasks was to draw up a multi-year priority agenda for the audit sector. In the agenda 2021-2023 the theme going concern is included. The way in which going concern is currently addressed in the auditor’s report, based on the audit of annual accounts and management reports, is perceived as insufficient by many users, according to the steering group.

The steering group wants mandatory reporting of activities performed in the context of going concern in the auditor’s report (pilot in 2021, implementation in 2022) and a going concern protocol that pays attention to the entire chain. The steering group also sees an increased risk of disruption of sectors or individual companies, partly due to innovation and digitization and propagated by the COVID-19 crisis. As a result mandatory training sessions for auditors will be held in 2021 on this topic.

Impact for companies

It is within expectation that disclosures in the management reports and the notes of the financial statements will increase in near future and it is foreseeable that the amount of time spend by an auditor on the going concern assumption will increase. As the risk approach of an auditor is mostly based on the likelihood and magnitude of financial statement risks, looking back, probably nobody could have estimated the impact of something like a pandemic. Financially healthy companies in heavily affected markets have a totally different outlook and risk profile than a year ago. It is most likely that even the less likely events are weighted in the future as the impact on the going concern assumption is immense.

Future of audit

The audit market will change, but what would it mean for your company, registered in The Netherlands? We at Crowe Peak inform our clients and we could inform you in depth on possible changes and the impact for your company. If you have any questions on the future of audit, please contact us.