Using financial ratios to judge business as a going concern

This is an item which might help to understand the role of auditors in reporting on a company’s annual accounts, and the message that the auditor’s opinion might give to stakeholders such as banks, suppliers and creditors. It looks at what makes a business a ‘going concern’ and emphasises the risk that, at the moment, the accounts are likely to show reduced liquidity and profitability. Does this necessarily mean that the business is about to fail? The article goes on to look at what might happen if investors and others in the business world jump to the wrong conclusions about these disclosures. If they do, this could undermine wider business confidence even further and make the overall economic situation worse.

Issues to consider: Which ratios might auditors and stakeholders use to assess whether a business remains a ‘going concern’? What other information should they also be looking at in reaching a balanced view? To what extent should all stakeholders work together to help companies keep going through the recession?