The auditors of two FTSE 350 airlines cannot confirm whether the companies will be able to continue operating for the foreseeable future due to uncertainty created by the global pandemic. EY and PwC highlighted the unpredictability of the future operations of International Consolidated Airlines Group SA [LON:IAG] and easyJet PLC [LON:EZJ] in their 2020 audit opinions.
Despite recent optimism in the leisure travel industry that resulted in rising stock prices and increased bookings, airlines still have a long road ahead to complete recovery. Companies report that they do not expect demand to return to 2019 levels until at least 2023 or 2024.
FTSE 100 member International Consolidated Airlines Group is the parent company of several airlines, including British Airways, Iberia, and Aer Lingus among others. IAG is also a member of Spain’s top market cap index, IBEX 35, the Forbes Global 2000, Fortune Global 500, and STOXX Europe 600. Ernst & Young issued the going concern emphasis on 2 March 2021. Just two weeks prior, the company announced that deferral of pension deficit contributions and procurement of a loan would result in a £2.45 billion increase to liquidity.
“The Directors of the Company have a reasonable expectation that the Group has sufficient liquidity to continue in operational existence for the foreseeable future and hence continue to adopt the going concern basis in preparing the financial statements.
However… in the event that a more severe downside scenario than those the Directors have considered were to occur the Group will need to secure sufficient additional funding which represents a material uncertainty that could cast significant doubt upon the Group’s ability to continue as a going concern.”
FTSE 250’s easyJet PLC received a similar finding from their auditor, PwC, in the 30 September 2020 opinion signed 17 November 2020.
“In the event there are further waves of the pandemic, or the implementation or continuation of local lockdown periods, leading to further travel restrictions being imposed in the markets easyJet operates in, or in the event of cash collateralisation by credit card acquirers of the unearned revenue balance, the Group and Company may require further financing. … the occurrence of such severe but plausible events and the availability of additional financing represents a material uncertainty which may cast significant doubt upon the Group’s and Company’s ability to continue as a going concern.”
Like IAG, easyJet has also worked to increase available cash. Between April and November 2020, the company had succeeded in raising over £3.1 billion by securing additional loans, issuing shares, and reducing their fleet.
ISA (UK) 570 requires auditors to assess an entity’s ability to continue as a going concern for at least 12 months from the date of approval of the financial statements. If auditors find conditions that could cast material uncertainty on an entity’s ability to continue, they must include an Emphasis of Matter to communicate the uncertainty in their opinion.
In both of these cases, management reviewed downside scenarios – the worst-case outcomes the companies could imagine. EY and PwC did not challenge management’s decisions that the companies were a going concern at the time the financial statements were approved. However, both auditors noted that the impact of the COVID-19 pandemic could not be predicted. As a result, material uncertainty exists that could potentially cause the companies to cease operating.
From the early days of the pandemic, UK regulators have pushed for improved auditor assessment of the going concern basis to address the challenges of accurate and useful financial reporting. In November, the FRC reported that auditors have improved their procedures in assessment of going concern disclosures.
FRC Executive Director of Supervision, David Rule stated:
“The pervasive and uncertain impact of Covid-19 has made assessing whether companies have a material uncertainty to going concern much more difficult for many boards and their auditors. No-one has a crystal ball, but investors do expect appropriate consideration and disclosure of uncertainties.
From the sample of audits reviewed, the FRC found that auditors had enhanced their procedures when auditing management’s going concern assessment. The audit procedures were proportionate to the risks facing the companies, which varied depending on the impact of Covid-19 on their businesses.”
Meanwhile, the Institute of Chartered Accountants in England and Wales has urged auditors not to overuse these measures. They note that “widespread use of emphasis of matter paragraphs may diminish the effectiveness of the auditor’s communication about important matters.”
This analysis uses data from the Europe Audit Opinions database, powered by Audit Analytics.
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