As entities cope with the economics of coronavirus, we recommend they take actions along the way to try to avoid “substantial doubt” about an entity’s viability as a “going concern” and the resulting going concern statements in audit opinions. This going concern issue not only relates to Form 10-K audit opinions, but other situations such as offerings where auditors must reaffirm audit opinions and disclosure in Form 10-Qs where management may have to assume that the entity will continue as a going concern in the Critical Accounting Estimates and Assumptions. Proactive steps on liability management and strategy may convince auditors that there is no need for them to have substantial doubt about an entity’s ability to continue as a going concern over the next 12 months.

Auditors’ are required to insert a going concern statement in audit opinions if there is substantial doubt about the ability of an entity to continue for that ”reasonable period of time,” not to exceed one year beyond the date of the financial statements being audited.” See the American Institute of Certified Public Accountants’ (“AICPA”) AS 2415 “Continuation of an Entity’s Ability to Continue as a Going Concern.” Auditors are directed to consider conditions and events, which include:

• negative trends (recurring operating losses, working capital deficiencies, negative cash flows from operating activities, adverse key financial ratios),
• other financial difficulties (defaults, dividend arrearages, supplier trade credit denials, debt restructuring, statutory capital noncompliance, need for new financing or substantial asset disposals),
• internal matters (labor difficulties, project dependence, uneconomic long-term commitments, significant operations revisions needed) and
• external matters (legal proceedings, legislation, matters that might jeopardize an entity's ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; uninsured or underinsured catastrophe such as a drought, earthquake, or flood). Coronavirus ticks many of these requirements for some companies and industries.

Fortunately, the auditors are directed to consider management’s plans for dealing with the adverse effects outlined above. The auditor should consider whether it is likely the adverse effects will be mitigated for a reasonable period of time and that such plans can be effectively implemented. Management’s mitigation plans could include asset disposals (with acknowledgment of covenant restrictions and marketability work arounds), debt restructurings and new debt, expenditure delays, increase equity ownership, dividend reductions and accelerated liquidity from affiliates or investors). In light of the unique factors involved with coronavirus, government assistance and new regulations should also be factored into management’s plans should be factored into the going concern analysis. This is where entities can try to forestall any going concern statement, and ten steps are noted below.

Try to Avoid a Going Concern Statement Related to Coronavirus. Evidence of strong management plans that would cause an auditor to be persuaded that its “substantial doubt” about an entity’s ability to continue as a going concern is mitigated and therefor no going concern statement is required might include the following:

1. Tone at the Top. A tone at the top of proactivity, creativity and ability to process information and adjust from management may go a long way to help convince an auditor that the management’s plans for recovery are sufficient to avoid substantial doubt on an entity’s viability. A recognition of the impact on the many stakeholders shows leadership. Demonstrating when new coronavirus economic related data became available and management’s proactive consideration and responses, if necessary, to that information may be helpful.
2. Continuity Plan (“BCP”). A BCP should be drafted and/ or updated and cover at least three scenarios related to coronavirus and its impact, with adjustments to the best, middle and worst-case scenarios being made in a timely and realistic manner. Bankruptcy lawyers and advisors should be consulted and their advice incorporated in the BCP and strategy planning since customers, suppliers and other stakeholders may file, and entities themselves should understand how it all works.
3. New Regulations and Governmental Support. BCPs should cover which of the many regulatory changes and benefits that are becoming available for entities impacted by coronavirus on all stakeholders of an entity may show a holistic understanding of the coronavirus situation and management’s ability to manage through it.
4. Documentation. Documentation that is thoughtful, complete and timely may help provide a sense that management is and has been “on it” and is proactively addressing coronavirus related issues. Minutes of meetings should be kept that cover the dates, duration, attendees and topics covered. Agendas and materials should be saved. External resources, including outside reports, should be saved and separate actions should be pulled into an overall plan to support for the auditors that there is a management plans to get through the coronavirus situation.
5. Board Oversight. Board oversight that is engaged, timely, constructive and professional may be very helpful in avoiding a going concern statement, particularly where board directors have crisis management experience and evidences sound business judgements, strong attendance and active participation at meetings. The Board should not only be watching matters related to coronavirus, but keep continued vigilance on other threats, such as cybersecurity attacks, governmental actions with unintended consequences, and
6. Governance. Strong governance with evidence that there is a methodology of policies, procedures and controls that do not break down in a coronavirus situation may be reassuring to auditors. Keep regulatory and SEC filings current. Stay abreast of Environmental, Social and Governance (“ESG”) trends even though entities are under coronavirus stress, because there may be small things that can be done in this area that will be remembered or important later on.
7. Liability Management. Consider what the cash burn rate and liquidity needs are and might be under the different BCP scenarios, and act where necessary. This may include negotiating with lenders, suppliers and customers to increase liquidity and/or decrease costs. Negotiations with lenders and investors execute waivers, amendments, settlements, stock/debt transactions may be appropriate. Plans that defer or eliminate expenses or terminate contracts may help, depending on the associated costs and regulatory implications. Consideration of distressed M&A alternatives both as a buyer and a seller might help. Some M&A targets may be cash rich but have lower stock or asset prices, and that may make them more attractive. Buyers’ and sellers’ motives may be different than they were a year ago. Acquisition, disposition or investment strategies should get a fresh look. Some sellers of assets or stock who have resisted selling in the past may take a fresh look at offers given coronavirus. Prior plans and discussions that may have started and then been abandoned can be restarted. Be aware of asset impairment issues if assets are sold at a substantial discount and similar assets are still held. Tax issues may also be relevant, as well as derivatives. Labor and employment decisions should be made carefully with an view towards harmonizing them with new regulations and benefits and toward minimizing unnecessary disputes down the road. Keep track of and store supporting documentation and provide timely notices on potential insurance claims and dispute/litigation claims. Map out supply chains. Consider alternative sources or reducing product and service offerings temporarily. Simplify business lines to core operations, at least in the short term. Review distribution channels. Consider installment contracts and other customer support while monitoring old and potential new customers.
8. Dispute Management. Keep documentation and data in accordance with the entity’s data retention policies and with an eye to possible future dispute resolution and litigation. Keep lawyers involved in planning and strategy stages to help solve legal and regulatory issues up front. Send notices as required under contracts or regulations to preserve claims.
9. Inventory Key Contract Provisions Other Obligations. Organize and inventory contract provisions that may protect the entity or may entitle it to compensation or contractual relief or benefits. Review termination provisions that can be exercised for and against the entity as well as cross defaults, covenants, borrowing base and other financial calculations. Make sure reviews of any other obligations, such as consent orders, settlement agreements, credit and debt agreements, and shareholders’ agreements are done in light of coronavirus and management’s plans to manage through the coronavirus impacts.
10. Secure Up Skilled Negotiators, Advisors and Legal Team. Participation by external advisors such as strategic advisors, investment banks, consultants, accounting firms, public relations firms, investors, lenders, directors, and lawyers may help lend credibility and gravitas to management’s going concern plans as well as enhanced strategic advice. Management and in-house lawyers can upskill their liability management and other skills with external support on selected topic to support and enhance their strategic leadership through the coronavirus situation and going concern procedures. Since short term and immediate survival may be top of mind for many entities, having or enlisting experienced and skilled negotiators and advisors who provide timely and insightful updates on fast moving global, Federal, state and local developments and who can negotiate timely results, even if they are suboptimal, may be necessary in the suboptimal situation that is coronavirus.

SEC Disclosure Obligations if Coronavirus Going Concern Is Triggered. There are a number of SEC disclosures that have to be made by SEC reporting companies if a going concern path is taken by auditors. These disclosures include addition of new risk factors under Reg. S-K Item 105, “Risk Factors,” and additional disclosure under Reg. S-K Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” The SEC also provided guidance related to coronavirus in its March 25, 2020 CF Disclosure Guidance: Topic No. 9. Although risk factors and other SEC or private offering disclosure information must be drafted for each entity to cover its particular facts and circumstances, possible risk factors would include the going concern issue, plans to fix it may not work, delisting from a stock exchange and history of losses, if relevant, as well as risk factors related to coronavirus.

Going Concern as Evidence of Faltering Business and Its Reduction in Force (“RIF”) Implications. If a going concern substantial doubt is raised, there may be exception to some of the Federal, state and local requirements for a faltering business. The burden of proof may be on the faltering business, so much of the advice related to bolstering management’s plans that a going concern statement should not be required may need to be harmonized with the burden of proof on the faltering business exceptions of those labor and employment laws and regulations. Entities are encouraged to consult employment counsel and have them actively engaged in broader business and legal discussions related to strategic and going concern matters. There are also going concern considerations in other Federal stimulus laws.

Conclusion. Try to mitigate substantial doubt about a going concern situation and resulting statement in an audit opinion. There may be ways to implement a management action plan to forestall that occurring. If a going concern designation is made for a public SEC reporting entity, there are additional SEC disclosure obligations that will be triggered. The SEC has also issued guidance on extensive coronavirus disclosure and other obligations. This is a time when clients and their advisors and stakeholders need to pull together to move to more solid footing.