Auditors should accept some of the blame when a company on which they

have expressed an unmodified audit opinion subsequently fails, and they

should also do more to highlight going concern problems being faced by a
company. Discuss this statement

The concept of an expectations gap between auditors and the public is a key lens
through which assertions such as this one can be viewed. The first part of the
statement would appear to assert that the auditor is in some way responsible for the
failure of a company. This is not the case: those charged with governance are
responsible for risk assessment and risk management. It is not the role of the
auditor to become involved with the entity's risk management processes – indeed,
this could be deemed to constitute a management role, which would compromise
the auditor's independence.
However, it is true that the auditor should gain an understanding of the client's
business; this is a crucial requirement of ISAs. Amongst other things, it is necessary
for an auditor to audit management's assessment of the appropriateness of the
going concern assumption, for which a good understanding of the business risks
faced by the client is necessary. The auditor must judge whether the going concern
assumption used is appropriate. However, this is never a matter of cut-and-dried
logic: it is a judgement, based on an assessment of risk. It is in the nature of risk for
there to be uncertainties, and it is in the nature of judgement to contain elements of
doubt.
It is therefore to be expected that there will be cases where the auditor has judged
the going concern assumption to be appropriate, and yet the company fails within
the year. The question is not whether the assumption was proved correct by
subsequent events, but whether the auditor's assessment was reasonable and in line
with auditing standards.
There is more scope for discussion on the question of whether auditors should do
more to highlight problems. This may be the responsibility of management; it would
be possible for regulators and setters of accounting standards to require increased
disclosure on going concern. For example, financial statements could be required to
provide more narrative detail regarding the risks faced by an entity.
At present, auditors should disclose the presence of material uncertainties over
going concern by way of an emphasis of matter paragraph in the auditor's report,
and if they deem the assumption to be inappropriate then the opinion would be
modified. It may be possible for these disclosures to be made clearer than they are,
or for auditors to use their report to draw users' attention to any parts of the
financial statements that are significant to the assessment of going concern.
In conclusion, it is unfair to require auditors to accept the blame for company
failures which are the proper responsibility of management, although it may be
argued that more could be done by auditors to highlight going concern problems
where they exist.