When a company is at risk of collapsing or in financial trouble, several stakeholders may be affected, from employees to current and potential investors. This will eventually decrease the public’s trust in financial markets. The accounting team at GCS Malta discuss fraud and going concern and ways to mitigate these risks in this article.

Accounting fraud is when an entity is found to have illegally altered financial statements to manipulate financial performance and results. An example of this could be that an entity overstates its assets to make it look more financially healthy or overstate revenue to appear more profitable.

Fraud and going concern are often correlated. Fraud can threaten a company’s ability to continue business as a going concern for the next 12 months. It deteriorates investors’ trust in the company and may result in its failure. The COVID-19 pandemic has shown that it is impossible to prevent all corporate failures.

The main responsibility for preventing and detecting fraud rests on the company’s management and board of directors. Therefore, a company must apply an appropriate and effective corporate governance system to prevent fraud from occurring at all.

The following issues are considered to be the main doubts about an entity’s ability to continue as a going concern:

  • Cash flow problems
  • Inability to pay loan repayments
  • Legal proceedings against the company
  • Operating losses for several consecutive years
  • Denial of trade credit to the company by its suppliers

Ways to mitigate fraud and going concern risks

Companies’ management should be required to operate a fraud risk management system and focus on senior management fraud.

Mandate going concern management disclosure in financial statements based on its going concern assumption. Such disclosure should be required even if no financial uncertainty has been identified. This will convince investors that their investment will generate future profits and will result in a positive outcome or gain for them.

Companies should also assess company viability beyond the next 12 months to assess the company’s ability to adapt to changes and strive in the long run.

Why GCS Malta?

At GCS Malta, our accounting experts offer a full range of accounting services—from annual returns to bookkeeping. Contact us today for more information on how we can help you.

Article by Jasmine Fenech