A director’s appointment to a LATCO comes with extensive legal responsibilities. One area that is heightened in this current environment is the director’s responsibility to consider the LATCO’s ability to continue as a going concern. As well as managing the company’s ongoing trading, there are likely to be additional disclosures required in the accounts and there is also the legal risk that if you continue to trade with the knowledge that the business is insolvent, you could be charged with wrongful trading!
Most Local Authority owned companies will have the comfort of support from their respective parent Council, however increased costs and limited availability of additional funds during the pandemic might mean that even this may be less certain. When creating a LATCO the intention is to have a trading subsidiary that can support itself and generate an income to the Council rather than a Company that requires support. In this current environment local authorities are under increased pressure to show that their trading companies are performing as they should.
The government have at least acknowledged the increased uncertainty directors are facing as a result of the pandemic and to ease this have enacted emergency legislation to ensure that the directors are not personally liable. Full details can be found here.
This is helpful, but it is temporary legislation and specifically targeted at businesses that are most affected by the pandemic and national lockdowns.
When preparing your yearend statutory accounts, going concern is a concept that describes a company which can continue to operate without the threat of liquidation. The going concern status is specifically referenced in the audit report and if the ability of the company to operate for the next 12 months following the date the audit report is signed is in question, this needs to be disclosed.
Therefore, it is essential that management have developed an approach to assess whether their entity is a going concern. This approach will be different for every LATCO, and will be dependent on the sector it is operating in, the size of the company, its complexity and history of profitable trading.
All companies are encouraged to reverse stress test their business models and forecasts; this involves identifying events that may have a low probability but are enhanced during the current pandemic (an example would be a prolonged national lockdown, or withdrawal of government support). identifying the combination of events that would make the business model unviable and what could be done to mitigate or counter the negative effects.
If, after completing the assessment, management conclude that there are uncertainties, the next step is to consider, if these uncertainties were disclosed in the accounts, could they reasonably affect the economic decisions of the shareholders or any other users of the financial statements. As the situation is so fluid at the moment, this assessment must also be revisited at the point the accounts are authorised.
Ultimately disclosing a material uncertainty about a company’s ability to continue as a going concern could lead to a modified audit report. This does not necessarily indicate crisis. This demonstrates the directors being transparent about an uncertain situation.
If you are concerned about trading or need assistance with going concern assessments, forecasting or disclosures, the Ensors LATCO team are here to help.