September 25, 2012 – RSM Bird Cameron, one of the largest mid-tier accounting firms in Australia, has released its Audit Report following the completion of the 2011 reporting season. The analysis included 1042 listed companies, which accounts for 52 per cent of ASX listed companies, covering balance dates from June 2011 to May 2012. The analysis shows that 15 per cent of these audit reports included a going concern emphasis of matter paragraph.
Jason Croall, partner at RSM Bird Cameron, said, “RSM Bird Cameron wanted to find out what percentage of audit reports were impacted by going concern related issues.
“The analysis showed a significant increase from a similar audit report study conducted by RSM Bird Cameron in 2008, which could be an indication of potentially higher failure rates for companies and/or auditors being more conservative.”
In 2008, 315 companies were sampled, representing 17 per cent of ASX listed entities, and 6 per cent of audit reports lodged included a going concern emphasis of matter paragraph.
According to Croall there are two main drivers for this increase. The first is that 2008 was the start of the global financial crisis, and since then credit has become extremely tight. Companies have found it difficult to refinance and, with auditors looking to mitigate risk, this has led to a significant increase in the use of emphasis of matter opinions in audit reports.
The second is that legal actions against auditors are on the rise and auditors are looking at measures to decrease their potential exposure.
Croall said, “If credit markets tighten up, as some economists predict, then the going concern notations could prove to be correct. If however, credit markets stabilise and improve, many of these companies may continue to trade into the future.
“The challenge will be for investors who are trying to determine the difference between when a company has a real going concern issue and those instances where an auditor is acting conservatively.”
Croall believes that the number of audit reports with going concern related comments may increase to around 20 per cent in the next two years as auditors continue to mitigate the potential risk of being sued.
Croall said, “This may water down investors views surrounding these comments and ultimately make sorting through the bad stocks from the good quite difficult.”
Of the 6 per cent of companies that were identified as having going concern issues in 2008, that warranted a comment in the auditor’s report:
* 33 per cent failed and no longer trade on the ASX
* 22 per cent were taken over
* 45 per cent continue to trade on the ASX.
Croall said, “What this means is that companies with an emphasis of matter included in their audit report are not necessarily doomed to failure. Their inability to continue to trade and pay debts is, however, a concern.
“These companies are often seen as potential takeover targets as the share price is significantly low for a competitor to come in and make a play for the stock.”
About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia with national ownership and profit sharing and offers a full range of specialist advisory services, including business consulting and advisory, assurance and advisory, taxation consulting, corporate consulting and turnaround and insolvency. RSM Bird Cameron is a core member firm of RSM International, the sixth largest network of independent accounting and consulting firms in the world.