The report will assess how management,

auditors and government have had to change

their ways to help entities remain “going-
concern” in the aftermath of COVID-19.
 Table of Contents

Introduction...........................................................................................................................................2
Question 1.............................................................................................................................................2
What is meant by “Going-Concern”?.................................................................................................2
Management Responsibility..............................................................................................................3
Auditor’s Responsibilities..................................................................................................................4
Question 2.............................................................................................................................................5
Question 3.............................................................................................................................................6
Role of Company Directors................................................................................................................6
Role of Government..........................................................................................................................8
Question 4.............................................................................................................................................9
Conclusion...........................................................................................................................................10
Works Cited.........................................................................................................................................11
Appendix.............................................................................................................................................13
 Introduction

The COVID-19 pandemic has tested the resolve of mankind to its fullest extent. A disaster

for most, a blessing in disguise for some, it will be fair to claim that the pandemic has held

mixed fortunes for various stakeholders across the globe. Whilst companies operating in the

domain of technology, medicine and food have grown beyond imagination, those operating in

conventional industries such as hospitality, manufacturing and aviation have suffered

significant losses. These losses have raised questions with regards to the ability of firms to

maintain their status as “going-concern” (Leitch and Barbour, 2021). This report will

critically assess how the dynamics have changed for executive management, auditors and the

government in the aftermath of pandemic with particular focus on the aviation industry. The

report will further advise how each stakeholder needs to adapt in order to help entities

maintain their “going-concern” status.

Question 1

What is meant by “Going-Concern”?

As per the norms of IAS 1, “Presentation of Financial Statements”, the conceptual

framework of financial statements must be based on the foundations of accrual accounting

and going concern. The first assumption revolves around “accrual-accounting”, which

follows the matching principle, whereby transactions are recorded as and when they occur

rather than when cash is exchanged. The second assumption revolves around the concept of

“going-concern”, which states that a business will continue to operate in the future and

verifies that it will successfully satisfy its obligations for the foreseeable future. IAS 1 further

defines the term foreseeable future to a period extending to a minimum of 12 months, to

ensure clarity for the users of financial statements (Going concern | ACCA Qualification |

Students | ACCA Global, 2021). The going concern assumption reinforces the belief that the
firm is financially strong to avoid the prospect of bankruptcy and neither has an intention to

liquidate or partially sell off its assets. A firm that fails to meet the going concern assumption,

must report on a “break-up” basis. Failure to depict going-concern conditions is prevalent

during times of economic distress. The going concern assumption plays a pivotal role in the

context of financial reporting as it allows firms to account for deferrals in expenses and

revenues. Since firms are expected to continue to operate in the future, management can

continue to be prudent in their accounting. However, if a firm depicts deteriorating operating,

liquidity and solvency trends, assumptions made regards with accounting estimates and

policies need to be changed, eliminating the prospect of prudent accounting (Cormier,

Magnan and Morard, 1995).

Management Responsibility

Until 2016, ISA 570 didn’t require management to perform specific procedures to verify the

firm’s status as going-concern. However, recently, ISA 570 was amended to shift the onus on

a firm’s management to evaluate a firm’s long term prospects and make relevant disclosures.

The amendment in standards, require management to disclose substantial doubts that pose a

threat for firms to operate in the foreseeable future. As a result, management is required to

analyze all available information at a given point in time to assess the extent of doubt and the

time period over which it will extend. As per FASB, doubts can be deemed to be substantial

if they fulfill the following criteria:

i. Recurring operating losses.

ii. Working capital deficiencies.

iii. Negative operating cash flows.

iv. Failure to satisfy debt covenants.

v. Restructuring of debt.

vi. Poor credit history.

 vii. Substantial litigation and legal charges.

In addition to internal factors, management is also required to assess the size and complexity

of the business and the correlation between the firm’s fortunes and external factors in its

macro-environment. The reason behind shifting the responsibility of disclosure on

management is to reduce the danger of information asymmetry between investors and users

of financial reports, whilst also eliminating disparity between investors and auditors.

Although ISA 570 has imposed a duty upon management to make relevant disclosures, it has

given them the right to disclose the information at a time and in a manner of their own

discretion (International Federation of Accountants, 2021).

Auditor’s Responsibilities

As per ISA 570, the need to determine a firm’s ability to remain “going-concern” does not

fall within the realm of an auditor’s duty. The auditor’s responsibility is to provide reasonable

assurance with regards to the quality of a firm’s financial statements. In doing that, the

auditor is only supposed to evaluate the appropriateness of a firm’s use of going concern

assumption and whether there exists material uncertainty about the entity’s ability to operate

in the foreseeable future. To achieve these objectives, an auditor can indulge in the following

activities:

i. Read minutes of shareholder meetings to decipher cash-flow difficulties.

ii. Contacting the firm’s legal advisors to gain awareness about ongoing and future

litigation and to gauge their outcome.

iii. Obtain and review reports of regulatory actions.

iv. Evaluate how the firm plans to satisfy unfulfilled orders.

ISA 200 further reinforces the limitations for the auditor to detect material misstatements that

may arise in the future. Since the auditors lack information to make future predictions, an

absence of any reference with regards to going concern risk can’t be considered binding and

thus can’t be deemed as a guarantee to the firm’s ability to continue to operate for the

foreseeable future (International Federation of Accountants, 2021).

Question 2

An industry that has suffered the full brunt of the pandemic is the aviation industry. The

aviation industry comprises all elements of air travel and activities that help facilitate it. On a

global scale, the aviation industry generated a revenue of over $800 billion in 2019. The

nature of the industry made most believe that no external factors could adversely influence

the fortunes of the aviation industry. However, the advent of the COVID-19 proved to be

disastrous beyond imagination. Owing to the worldwide lockdown imposed as a result of the

coronavirus, the industry’s revenues halved to nearly $328 billion (Mazareanu, 2021). Italy, a

nation ridden with rising number of coronavirus cases, saw its economy crash resultantly.

This crash dragged the aviation industry down as the number of visitors to the airport

dropped by 98% from March, 2019 to March, 2020 (Italy: coronavirus impact on air transport

industry 2020 | Statista, 2021). The significant reduction in the number of visitors can be

attributed to the restrictions imposed on international travel by governments across the globe.

This reduction in demand has forced airline carriers into cancelling their leases and selling off

their assets. Whilst certain airline carriers have approached the government for financial

support, others have attempted to restructure their payment terms. Airlines have had to fly

empty aircrafts to maintain their entitlement slots, raising their costs significantly. Moreover,

following COVID-19 protocols has further increased costs, putting a further strain on the

airline companies (COVID-19 and the practical implications for the global aviation industry,
2021). The adverse influence of the pandemic has resulted in a ripple effect on the entire

aviation supply chain, with aircraft producers such as Boeing reporting a $15.25 loss per

share in the fourth quarter of FY20 (Root, 2021). In addition to that, the entire Italian

economy suffered shocks as a result of the slowdown in aviation industry as the country

faced more than half a million job losses, of which 4.8 million can be attributed to the

industry in question (The impact of COVID-19 on aviation | Airlines., 2021). In order to

assist the aviation industry stay afloat, the Government of Italy took several initiatives under

Article 107(2) of the Treaty on the Functioning of the European Union. As part of these

initiatives, Italian licensed air-carrier companies were entitled to compensation for damages

ensued as a consequence of the emergency in place. Moreover, the government restructured

the national airline, Alitalia such that it created a new state owned entity. The newly created

entity will act as a transferee of Alitalia’s air transport business to another party. It will also

receive €500 million to satisfy its near term financial obligations (Reuters Staff, 2021). With

respect to the going-concern status of firms in the aviation industry, it can be stated that their

fortunes are currently hinged upon the success of the COVID-19 vaccine. Whilst

international travel has resumed to some extent, the uncertainty associated with the pandemic

has cast a gloomy cloud over corporate affairs. However, with the government coming to the

aid of the aviation industry and with COVID-19 vaccines proving to be successful, it can be

deduced that the firms operating within the industry are likely to maintain their status as

“going-concern”. Whilst these companies may suffer a liquidity crunch in the near future, it is

likely that with the assistance of the government, they will manage to stay afloat in the long

run.
 Question 3

Role of Company Directors

The adverse consequences of COVID-19 have been widespread, ranging from the health

sector to the corporate world. Whilst the pandemic has forced managers across the globe to

place more stringent operating procedures, the core essence of their duties has not changed

much. Directors are entrusted with the responsibility to act in the best interest of the firm,

ultimately maximizing shareholder value. In doing so, managers are responsible for ensuring

that firms remain liquid, profitable and solvent. With the uncertainty posed by COVID-19, it

is imperative that the management drafts a COVID-19 strategy to deal with unanticipated

risks posed by black swan events. In order to make their strategy comprehensive, the

management must try to gain access to maximum amount of information about a firm’s

external environment. The responsibility of those with authoritative powers can be divided

into two different time horizons. In the short term, managers must place emphasis on the

liquidity and profitability of their business. For this purpose, managers should prepare

detailed financial forecasts, accounting for sensitivity analysis for factors that can have

substantial impact on the firm’s beta. Their role, however, is not only limited to the

preparation of financial forecasts as they must also monitor activities to ensure that their

forecasts are in line with the ground realities. Additionally, management should focus on

primary and secondary ways of maintaining liquidity. The testing nature of the pandemic

requires that the management should have strong compliance measures in place to deter its

employees from evading regulatory duties. Moreover, besides financial considerations, the

firm’s management must take into account non-monetary considerations such as goodwill

and ethical responsibilities. To achieve this objective, management must engage in effective

stakeholder management whereby it balances interests of a various set of people. For

example, managers must adopt operational procedures that focus on physical and mental
health of their subordinates. Furthermore, as a result of the coronavirus, managers must focus

on inculcating flexibility and agility in their business strategies to not only satisfy their

customers with evolving product lines but to also survive cut-throat competition. Lastly,

COVID-19 has acted as an initiator to the adoption of technology in various aspects of life.

Therefore, those with authority in the corporate world must follow suit and make use of

technological advancements to enhance operational efficiency and thus increasing

profitability (The role of directors during COVID-19 and beyond, 2021).

Role of Government

In response to the pandemic, the Italian government launched a series of initiatives ranging

from the “Cure Italy Decree” to “Emergency Income”, to ease the economic burden upon its

masses (The measures introduced by the Italian government to support families, 2021). With

respect to corporate entities and their ability to continue as “going-concern”, the Italian

government launched an economic stimulus package whereby it decided to inject €25 billion.

The main objective behind the relief package was to help suppressed sectors such as aviation,

tourism, logistics which have suffered most as a result of the virus. The state owned, Italian

Banking Association has also established a moratorium on debt repayment to help firms who

have obtained loans until 31st January, 2020. Furthermore, the National Institute for

Promotion and development finance institution have increased the funding limit for the

banking system to assist smaller firms deal with liquidity crunch. In addition to government

spending, the government made optimal use of another fiscal tool, tax rate, whereby it

reduced direct and indirect taxes imposed upon business in order to incentivize them to

continue operations (KPMG, 2021). With respect to the aviation industry specifically, the

European Commission approved a support package worth  €199.45 million for Alitalia in

order to provide compensation to the firm for the damages it faced due to the pandemic.

Moreover, as mentioned earlier, the government restructured the entity to improve its
operational efficiency. The government’s assistance to companies deserves plaudits.

However, the government’s responsibility doesn’t end at just extending financial support as it

must ensure that there is strict implementation on its orders. Moreover, the government must

ensure that support must be transparent, non-discriminatory, proportionate and timely in

order to be effective (OECD, 2021).

Question 4

The spread of the novel coronavirus has posed different challenges for all genres of

professions. The auditing profession is no exception to these obstacles. ISA 315, requires

auditors to assess the possibility of material misstatements in financial reporting through a

comprehensive understanding of a firm’s internal and external environment. The standard

further requires auditors to revise their opinion in case new information is obtained, through

additional procedures, that contradicts with the earlier established hypothesis. The uncertainty

posed by COVID-19, has increased the business and operational risk of entities. Thus, as per

ISA 330, this increase in risk has ultimately led auditors to re-perform procedures to assess

the added risk and to check whether meaningful variables have changed by substantial

proportions or not. To achieve their objective, the auditors must obtain sufficient and

appropriate evidence that is reflective of the existing risk of material uncertainty. Moreover,

before drawing an audit conclusion, the auditors must ensure whether risks of material

misstatement at the assertion level are relevant or not. However, due to the restrictions

imposed by COVID-19, auditors can no longer physically visit the premises of the entity in

question, posing an obstacle to the need of obtaining physical forms of evidence such as

inventory count. In order to deal with the given issue, the auditors are allowed to use

technology to help them evaluate the reasonableness of the documents prepared by

management. Another challenge that the auditors have faced as a result of COVID-19, exists
in ISA 540, that requires auditors to judge the reasonableness of the accounting estimates

made by the management. To curb the possibility of misstatements through inappropriate

estimates, management must remain alert to current and possible circumstances that may

increase risk. As per Financial Reporting Council, to gauge the full extent of threat to going

concern status of an entity, auditors must report based on available facts and circumstances

rather than generic reports. The facts that the auditors must focus on are concerned with the

firm’s liquidity during COVID-19, whether it satisfied its debt covenants, how they used

government subsidies and how COVID-19 impacted the firm’s operations. In case the entity

has received government support, the auditor must assess the duration for which the firm will

continue to receive support, how reliant the firm is on the extended support, the government’s

transition plan and whether the business has reformulated its business strategy or not. The

auditor’s report then, must cater to changes in the reporting of key audit matters that may

have resulted due to the outbreak of the virus. Moreover, auditors must also express concerns

about material uncertainties as and when they feel the need. They must then elaborate upon

their concern, discussing the consequences that may arise in the worst case scenario. In case

the auditor feels that the situation has worsened and that the company’s going concern status

is in jeopardy, then they should issue a qualified or adverse opinion (KPMG, 2021).

Conclusion

It can’t be argued that the spread of the coronavirus has had a lasting impact over the globe

and how humans have functioned. However, just like any event, one must consider COVID-

19 as a learning opportunity, that has forced humans to change their way of operations.

Likewise, the situation demands adaptability from management, auditors and government to

ensure continuity of businesses in the long run. The management of firms within the aviation

industry must take greater responsibility and take initiatives to protect the firm’s liquidity,
profitability and solvency in the near future, whilst formulating strategies that will help their

respective entities touch new heights in the long run. Auditors, on the other hand, must aim

for flexibility and attempt to inculcate technology in its processes. This will allow auditors to

accurately gauge the going concern status of an entity despite the obstacles put in place by

COVID-19. Lastly, the government must continue to extend support to the aviation industry

and must ensure that its directives get implemented with fairness and accountability.

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 Appendix

Figure 1: Financial Market Performance in COVID-19 era (Source: BBC News https://www.bbc.com/news/business-
51706225)
Figure 2: Impact of COVID-19 on global tourism (Source: Forbes
https://www.forbes.com/sites/niallmccarthy/2020/05/05/covid-19s-impact-on-tourism-which-countries-are-the-most-
vulnerable-infographic/?sh=6b3cc0ac1906)