Going Concern: The Evidence Auditors Expect from PE-Backed and Leveraged Businesses

Going concern used to be a short paper prepared at the end of the audit. Following successive regulatory reviews, it is now one of the most heavily documented areas of the file, particularly for businesses carrying debt, covenants or investor funding commitments.

For PE-backed businesses this creates a specific pressure: the assessment depends on forecasts, facilities and sponsor intentions, and the auditor must evidence each of those independently of management's confidence.

Start with the assessment period

The assessment covers at least twelve months from the date the accounts are approved, not the balance sheet date. Because approval typically falls several months after year end, the forecast must extend further than management often expects.

Build the model to cover the full period from the outset. Extending a model mid-audit rarely produces a coherent document.

The base case has to be defensible

Auditors compare the base case to recent actual performance and to the budget presented to the board. Where the forecast assumes a step change in margin, collections or volume, they will ask what supports it.

Strong assessments show the bridge from last year actual to forecast, identify the two or three assumptions the outcome is most sensitive to, and reference external evidence such as signed contracts, pipeline data or agreed price increases.

Downside scenarios that are actually severe

A common weakness is a downside case that reduces revenue by a token amount and still comfortably clears every covenant. That tells the auditor nothing and invites challenge.

A useful severe but plausible scenario stresses the specific vulnerabilities of the business: the loss of a major customer, a delay in a price increase, working capital outflow from growth, or a rate movement on floating debt. Model each on its own and in combination.

Covenant headroom is the pressure point

Where facilities carry leverage, interest cover or minimum liquidity covenants, the assessment must test compliance at each measurement date under both base and downside cases, using the covenant definitions in the facility agreement rather than statutory measures.

Auditors will read the agreement. If the model uses a different EBITDA definition to the one the lender uses, that will be identified.

Mitigating actions must be within management control

Actions relied on in a downside case need to be realistic and available without third-party consent. Deferring discretionary capital expenditure and pausing recruitment usually qualify. Assuming a sponsor injects equity, or that a lender waives a breach, generally does not unless there is documented commitment.

Sponsor support letters are frequently offered and frequently insufficient on their own. Auditors assess whether the sponsor has the ability as well as the intent, and whether the letter is legally binding.

Documentation that stands up

A complete going concern file typically contains the cash flow model with clearly stated assumptions, the covenant compliance calculations, the downside scenarios and their rationale, the facility agreements and any waivers, the board minute approving the assessment, and the disclosure drafted for the accounts.

Preparing this before fieldwork rather than during it removes one of the most common causes of audit delay and of last-minute disclosure debate.

The board dimension

Going concern is a director responsibility, not a finance technicality. Boards should see the model, understand the sensitivities and record their conclusion in the minutes. Where that discussion is evidenced, the audit conversation is materially shorter.