Indicators of a Company’s Decline in Going Concern

Indicators of a Company’s Decline in Going Concern

Going concern is a central concept and assumption in accounting and a descriptor for companies that can operate without the threat of bankruptcy or liquidation. It is also a fundamental assumption in the preparation of financial statements. Accounting services in Singapore – and internationally – are required to prepare financial statements assuming that a business entity will continue in its operations in the foreseeable future. Both management and auditors will give their opinion over the going concern status of an entity during audits when there is disclosure of these statements.

However, this assumption is only made when an entity responds positively to vital ‘health’ checks. Companies that go through audits and checks and return unfavourable results may have indicators that their company’s longevity is in question. Read on for some of the major indicators that a company’s going concern is no longer safe.

Deteriorating Liquidity

A company may be having challenges with maintaining its liquidity position. That is, there isn’t sufficient cash to handle its regular activities. In most cases, accounting services providers in Singapore will look out for root causes of such a cash crunch including declining sales, increasing costs, recurrent losses, negative financial ratios (such as an increased gearing), and so forth. However, the most vital indicator of going concern problems in this regard is when a company doesn’t make satisfactory financing arrangements to back the liquidity challenges.

Declining Profitability

The profitability of a company is essential for its long-term sustainability. However, repeated losses occurring over several financial years are indicators that the company may not survive the long haul. One way to tell when a company is facing profitability issues if when they have increased short-term borrowing without a requisite increase in their trading volumes or revenues.

Trading losses could be as a result of the company being unable to innovate and develop commercially viable products. In this case, when a business is facing profitability challenges, accounting services in Singapore will be keen on the revenue side to determine if there’s a threat to its going concern state.

Business Structure Issues

The accounting services providers will look out for structural issues within a company. Is the company over-reliant on a single client or a single supplier? What is the stability and sustainability of this client or supplier? Are there intellectual property rights issues with the company’s products?

If there’s reason to doubt an affirmative answer to such questions, there’s reason to question the going concern status of the company.

Legal Challenges

The legal issues which a company is facing are often overlooked by ordinary folk however they are crucial when considering a company’s going concern state. A small software company could be facing legal action from a giant multinational which would threaten its continued existence. In other cases, a company could be facing penalties from regulators which could cripple its operations.

Legal challenges often affect the going concern status of start-ups or small enterprises. Large corporates and multinationals often have sufficient systems and financing to overcome legal challenges. However, legal issues could still disrupt their operations significantly.

Lastly, it’s the Company’s Systems

Accounting services providers in Singapore including auditors will look at how well a business maintains its records and how accurate they are.

Poor record keeping is an indicator of inadequate systems to manage operations which could land it in problems with regulators. Moreover, poor records cause accounting services providers to doubt the accuracy and reliability of any books they may have evaluated.

If an auditor comes across any of these indicators, they will first discuss it with management to address the issue. However, if the indicators persist, an auditor will be left with no choice but to issue an adverse opinion on the going concern qualification of a company.

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