6 minute read
KPR
Going Concern Assessments - use the right forecasting tools for the job!
In Edition 27 of Chartered One we considered the different interpretations of the Going Concern Statement required under IFRS and FRS and pointed out that both the FRC and the ICAEW had issued guidance during 2020 to assist management and auditors with the tricky matter of Going Concern assessments in the Covid era.
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Not long after we had gone to press, the FRC issued a further news release which confirmed audit firms have implemented additional measures to enhance their evaluation of companies’ Going Concern assessments since the start of the Covid-19 pandemic1. That was the good news.
The results of the review itself were carried on a separate linked document, here, which identified that the review was on a sample of eleven audits which covered the seven largest UK audit firms. Some of this could be considered the not so good news!
1. https://www.frc.org.uk/news/november-2020/audit-firms-enhance-going-concern-assessments
Picture Credits - https://cfo.economictimes.indiatimes.com/
The heading to Appendix 6 of the results of the review had this to say – “There was an inconsistent approach to testing the integrity of the Going Concern forecast models” This seems somewhat euphemistic when one considers what is then revealed – and bear in mind – these are a sample from the seven largest audit firms in the UK!
- On one audit the integrity of the forecasting model was not adequately tested. - On another audit there was insufficient evidence of the testing of the forecasting model. - On two further audits the audit procedures were limited to manual testing; the approach would have been enhanced by the use of automated spreadsheet tools.
In a section highlighted as “Good practice examples”
- Given the complexity of the models, some audits also used data analytical procedures, including Computer
Aided Audit Techniques (“CAATs”), to test the integrity of the cash flow models….. on three audits, we found that the use of specific tools to check the mathematical and mechanical accuracy of the models highlighted matters such as circular references, formulaic anomalies and hidden cells/input fields. - In some cases, the auditors had engaged specialists to assist in checking the integrity of the forecasting models. Given the propensity for spreadsheet models to generate all sorts of flaws, many not at all obvious to management, let alone “circular references, formulaic anomalies or hidden cells/input fields” why does the FRC appear to be condoning the use of “spreadsheet tools” to prepare forecast for “Going Concern” assessments. Spreadsheets like Excel are wonderful tools - but are demonstrably not for building reliable forecasts! The FRC’s own text says it all – “Given the complexity of the models….”
Good forecasts don’t have to be complex! To produce reliable forecasts, management should be employing purpose-built forecasting software based on robust double entry type architecture which produce four-way reports, forecast balance sheets, profit and loss accounts, cashflows and funds flow statements. With these forecast reports, all integrated and balanced, management – and the very relieved auditors – can concentrate on the important issues of whether the inputs are sound and reasonable and focus on the outputs, generated in familiar accounting format, rather than worrying about formulaic anomalies and hidden cells and input fields! Or having to hire in specialists to check the integrity of the forecast models!
As stated above – good forecasts don’t have to be complex. Comprehensive yes, dealing with multi currencies, multi bank accounts, consolidations, just about any type of loan imaginable, fixed assets, autocalculated depreciation, wages, PAYE, NI, Pensions, multiple stock and WIP calculations, invoice discounting, various capital structures, departments, cost & profit centres and gross profit percentages, Key Performance Indicators, What if scenario planning; these are the sorts of features available in a comprehensive forecasting package.
Why ever would any company or their auditors wish to waste manpower - and expose themselves to the wide and varied array of problems from multiple sources using Excel for their forecasts as highlighted in the European Spreadsheet Risks Interest Group website, here? When there is purpose built reasonably priced forecasting software available?
Good forecasts don’t have to be complex! To produce reliable forecasts, management should be employing purpose-built forecasting software based on robust double entry type architecture which produce fourway reports, forecast balance sheets, profit and loss accounts, cashflows and funds flow statements."
Forecast 5 is just such a forecasting programme. Developed in New Zealand to replace the very popular but now no-longer-supported and unstable Sage Winforecast, Forecast 5 delivers fast, accurate forecasts and with integration to Power Query for, eg, covenant evaluation being added shortly, Forecast 5 is arguably the most suitable tool for developing Going Concern Assessment forecasts. To discuss your forecasting requirements, to learn more about the features and benefits of Forecast 5 or to organise a demonstration of Forecast 5, please contact the UK Distributor.
Johnny Kipps of KBR Ltd 18, Bowling Green Road Castletown, Isle of Man, IM9 1EB Johnny@Forecast5.co.uk, or phone 07770 608 900
www.Forecast5.co.uk
Liverpool Society of Chartered Accountants – Equality, Diversity & Inclusion
Barbara Boyle, is our Society’s DIVERSITY CHAMPION, and here she expresses some of her aims and hopes to highlight the many opportunities we have as a Society to add to this hugely important agenda.
MOne of the key initiatives that Barbara is developing is a very good working relationship with our fellow professionals. Here she discusses recent progress:
The Liverpool Law Society have their own Chair of ED&I in Nina Sahu, and a recent meeting between myself and Nina started to create some aims and ideas.
1 Aims:
Develop collaboration across Liverpool Professional Services. What can we learn from each other? Establish best practice.
2 Background to Nina’s role
Nina Sahu (Liverpool Law Society Chair of ED&I)
The Liverpool Law Society ED&I committee was set up last year. Anyone who wanted to join it could do so, and different volunteers and members have different interests.
3 Activities and / or proposals
undertaken by LLS that could be used by LSCA: • Engage HR Directors: Create best practice policy for law recruitment, especially for larger law firms in
Liverpool. - Use of “blind” CVs - Request recruiters to provide a diverse range of candidates • Invite our large firm to sponsor a range of event • An Equal Pay event would address multiple “characteristics” such as: race, gender, LGBT, disability • Hold an event for “Allyship” that addresses the protected characteristics.
4 General observations about Diversity
We both agreed and noted a general lack of engagement from the wider Liverpool area when requesting people get in touch to progress diversity matters e.g. in reference to the New Gen Accountants network primarily based in London and the South East. Nina noted that it takes time to change culture. Also people may not want to stand out – e.g. they may not want to be known as “the Asian Accountant / Lawyer” or as the “gay Accountant / Lawyer”
5 Next steps and actions
5.1 Progress the idea of having a subcommittee on ED&I for Liverpool
Accountancy firms. It could span a wider audience than LSCA committee and should involve representatives of larger firms in Liverpool.
5.2 Reach out to the larger
Accountancy firms in Liverpool and see what they are doing on
ED&I.
5.3 Reach out to other district societies – with large metropolitan areas such Manchester, Bristol, Leeds.
Have a round table discussion and share ideas. (The last national
ICAEW one attended by myself was in Feb 2019)
5.4 Identify sponsors for an event
5.5 We will also continue to develop these close links with the Liverpool Law Society and look to further engage with the other professional bodies in the city.
