Every company that has ever existed has failed – except for the ones still around. This may seem obvious, but it highlights a criticism of the “going concern” principle – the assumption that a business will continue to operate for the foreseeable future. It is short-sighted to assume that companies will exist for ever. After all, only half of new companies are destined to survive for five years. And it is not just start-ups that suffer. Last week the auditors of accountants Vantis and of the holding company for British record label EMI questioned the ongoing viability of their businesses. This doesn’t mean bankruptcy is imminent, but it puts stakeholders on notice that something is badly wrong.
In spite of its faults, the assumption of longevity is essential to ensure that banks continue to lend, suppliers send provisions, and employees feel secure so they don’t jump ship: just saying a company may not be a going concern can become a self-fulfilling prophecy. The problem, though, is the presumption of innocence. In other words, directors and auditors have to find a reason why a company should not be a going concern rather than why it should be. If the burden of proof was reversed, investors might gain a greater insight into their company’s health.
In the wake of EMI and Vantis, more warnings may emerge. Liquidations in England and Wales reached almost 20,000 last year, the most since 1993 according to the Insolvency Service and Companies House. And while insolvencies have fallen slightly in the past two quarters, they tend to lag recessions. Retailers, which have just passed the peak Christmas sales period and face a possibly bleak year, may be particularly at risk. With most full-year audits nearing completion, more directors may be signing off on their company’s viability with a heavy heart.
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