Material uncertainty of world cup failure
Is failure from a material uncertainty just another example of a world cup giant killing, asks LSCA Technical Committee chair Jamie Tomlin.
There has been a lot of press recently about business failures. I make no comment on any specific case, but is this sometimes simply an example of statistics in action?
Let me explain. Material uncertainties exist, they are negatives to which a business is exposed. But an uncertainty is that, an uncertainty.
There is a risk, even if it is relatively modest, that failure could follow. As the number of entities with a going concern material uncertainty increases, the risk that one will actually fail increases. I should not then be surprised when this happens.
It is only right that consideration should be given to whether current requirements, including disclosures, are adequate. If a better understanding of the uncertainties to which a business is exposed can be given through improved disclosure, this has to be good for a user of the accounts.
Understanding the dynamics of risk is fraught with problems. How those risks are impacted and the likelihood of variability in those risks needs to be explained, together with an appreciation that such risks are not static.
Accounting can deal very well with static items but is much weaker when thinking about variability; and the future - going concern - is a variable. Some help is given for some variables, for example for financial instruments, for defined benefit pension schemes, but for the ultimate estimate, going concern, practically nothing. I recognise that a challenge exists with disclosure possibly leading to a self-fulfilling outcome.
Risk is inherent in economic activity. Failure cannot be eliminated, and we must not expect that changes in processes, disclosures, or assurance will remove risk. It won’t.
While the media debate may not be generous to auditors, the mere presence of the debate may help to raise awareness of the issues and mean users do give it more thought. So there may be a (small?) side effect of reducing the gap in understanding.
And the world cup? Simply that with enough matches the chances of a minnow beating a footballing superpower becomes a near certainty.
Jamie Tomlin is chair of the LSCA Technical Committee
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