This article addresses a narrower but equally consequential question: when a material uncertainty exists but the going concern basis is still appropriate (the company can probably survive but the doubt is significant), has management disclosed the uncertainty adequately?
The distinction matters because the disclosure determines the opinion.
If the material uncertainty is adequately disclosed: the auditor issues an unmodified opinion with a “Material Uncertainty Related to Going Concern” paragraph. The financial statements are fairly presented, including the disclosure that alerts users to the uncertainty. The audit report draws attention to the disclosure. The user is informed.
If the material uncertainty is not adequately disclosed: the auditor issues a qualified or adverse opinion. The financial statements are not fairly presented because they omit information that users need to evaluate the company’s ability to continue.
The gap between adequate disclosure and inadequate disclosure is where most disputes between auditors and management occur, because management teams consistently underestimate what “adequate” requires.
What adequate disclosure requires
Adequate disclosure of a material going concern uncertainty must include, at minimum:
The events or conditions creating the uncertainty. Not a generic statement (“there is uncertainty about the company’s ability to continue as a going concern”) but a specific identification of what is causing the doubt. The financing arrangements have expired. The largest customer has terminated its contract. The company has defaulted on its loan covenants. The regulatory licence is suspended. Each event or condition must be named because the user needs to understand the nature of the risk, not just that risk exists.
The potential consequences. What happens if the uncertainty materialises? If the financing cannot be renewed, the company may need to file for insolvency. If the largest customer is not replaced, revenue will decline by 40%. If the covenant default is not waived, the lender may accelerate the debt. The consequences inform the user’s assessment of the severity of the uncertainty.
Management’s plans to address the uncertainty. What is management doing about it? The company is negotiating replacement financing. The company is diversifying its customer base. The company is discussing a covenant waiver with the lender. The plans must be specific and credible. A vague statement that “management is exploring options” is not a plan. A statement that “management is in discussions with three potential lenders and expects to conclude a facility by June” is a plan.
The explicit statement that the events or conditions create a material uncertainty that may cast significant doubt on the entity’s ability to continue as a going concern. This is the sentence that management most frequently resists including, because it uses the words “material uncertainty” and “significant doubt,” which management views as alarming to users, lenders and investors. The sentence is mandatory under the accounting standards. Its omission makes the disclosure inadequate.
Where disclosures typically fall short
Problem 1: The uncertainty is buried. Management discloses the relevant events in Note 38, paragraph 4, in language that a non-specialist would not recognise as a going concern issue. The financing expiry is mentioned as “the company is in discussions regarding the renewal of certain credit facilities.” The covenant breach is mentioned as “certain financial ratios were below the contractually specified thresholds, and the company is in communication with its lenders.” The language is accurate. It is not prominent. It does not use the phrase “material uncertainty.” A user reading the financial statements would not recognise these notes as a going concern disclosure.
SA 570 does not prescribe a specific location for the disclosure, but the auditing standards and accounting standards collectively require that the disclosure be sufficiently prominent that a user reading the financial statements would understand the significance. Burying the disclosure in a subsidiary note, in euphemistic language, without the words “material uncertainty” and “going concern,” is not adequate.
Problem 2: The plans are vague. Management discloses the uncertainty but describes its plans as “exploring strategic alternatives” or “evaluating options for strengthening the financial position.” These are not plans. They are descriptions of the intention to make plans. An adequate disclosure describes specific actions (negotiating with identified lenders, selling identified assets, restructuring identified contracts), with timelines (expected completion by a specific date) and an honest assessment of whether the plans are feasible (the lender has expressed willingness to discuss, not guaranteed approval).
Problem 3: The consequences are omitted. Management discloses the events but does not state what happens if the plans do not succeed. The user needs to know: if the financing is not renewed, the company will need to liquidate certain assets, reduce operations or file for insolvency. The consequence statement is what allows the user to assess the severity of the uncertainty. Without it, the user cannot distinguish between a minor uncertainty (the company might need to delay a capital project) and an existential one (the company might cease to exist).
Problem 4: The disclosure is qualified with unwarranted optimism. Management adds language like “the management is confident that the company will successfully address these matters” or “based on the discussions held, the management believes the financing will be obtained.” These statements undermine the disclosure by creating an impression of certainty where uncertainty exists. If the management were certain, there would be no material uncertainty to disclose. The confidence statement contradicts the uncertainty disclosure.
The auditor’s assessment
The auditor evaluates the disclosure against four criteria: completeness (are all relevant events and conditions identified?), specificity (are the events, consequences and plans described in specific terms?), prominence (would a reasonable user reading the financial statements recognise this as a going concern disclosure?) and balance (does the disclosure present the uncertainty honestly, without unwarranted optimism or inappropriate reassurance?).
If the disclosure meets all four criteria: unmodified opinion with the “Material Uncertainty Related to Going Concern” paragraph in the audit report. The paragraph draws the user’s attention to the note in the financial statements that contains the disclosure. The audit report amplifies the disclosure but does not modify the opinion.
If the disclosure fails any criterion: the auditor must determine whether the failure makes the financial statements materially misstated. An incomplete disclosure (events omitted) or a missing disclosure (no going concern note at all) is a misstatement. The materiality and pervasiveness of the misstatement determine the opinion: qualified (if the omission is material but not pervasive) or adverse (if the omission is material and pervasive, which it typically is because the going concern uncertainty affects the financial statements as a whole).
What companies should do before the audit
Prepare the going concern assessment before the audit begins, not in response to the auditor’s request. The assessment should cover: every event or condition from SA 570’s three indicator categories (financial, operating, governance/external), management’s evaluation of each indicator’s significance, the cash flow forecast for at least 12 months from the balance sheet date, the status of every credit facility (confirmed, under renewal, expired) and the specific plans to address any uncertainty identified.
Draft the going concern disclosure in the financial statements with specific language: name the events, state the consequences, describe the plans, include the “material uncertainty” phrase. Share the draft with the auditor before the audit fieldwork concludes, so any disclosure inadequacy can be remediated before the opinion is formed.
The company that prepares the assessment and the disclosure proactively retains control of the narrative. The company that waits for the auditor to raise the issue loses control and risks an opinion modification that could have been avoided by adequate disclosure.
Northrop Management advises companies and audit committees on going concern assessment, disclosure adequacy, financial restructuring and the governance processes that address uncertainty before it becomes an opinion issue.
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