COVID-19: The role of the board when the company’s ability to continue as a going concern may be in doubt

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The economic fallout from the COVID-19 pandemic has been profound. Companies in numerous sectors, including energy, travel and retail, among others, are now under significant stress, and need to make plans to address the issue. Ultimately, their ability to continue as a going concern may be in doubt.

The board’s role when a company is facing significant liquidity issues is incredibly important. There are many decisions that need to be made and plenty of opportunity for others to be critical when leveraging 20/20 hindsight. Understanding the nuances of the financial accounting definition of a going concern is something the board needs to get their arms around. In the near term, the company might narrowly miss the requirement to have to make disclosures that there is substantial doubt about the company’s ability to continue as a going concern. But that narrow miss might also be a sign that the company will be facing a more challenging going concern discussion in a few months, or even a bankruptcy or restructuring down the road should economic conditions continue to worsen.

Questions for consideration

Making sure directors are getting the best information and are able to look at things from all angles will be key. As directors consider the facts and circumstances facing a company with challenging liquidity issues, they will want to consider some of the following questions:

  1. If management has determined that there is substantial doubt about the company’s ability to continue as a going concern, what are the range of potential impacts on the company? What are the conditions causing this conclusion? What analysis can be shared so that the board can understand the significance of the conditions? 
  2. How comfortable is the board with the level of conservatism in the analysis of the conditions and events that raised the substantial doubt? Has the board heard directly from outside advisors (auditors, bankers, etc.) regarding their insights about the situation?
  3. What actions are the company considering to mitigate the adverse conditions that could lead or could have led to substantial doubt? What are the “sacred cows” that are not being considered and why? Will those actions damage relationships with customers and suppliers?
  4. What scenario planning has the company done and how comfortable is the board with the key assumptions in those plans? How confident is management with the accuracy of the underlying data and methodologies used to create those scenarios and forecasts? Does scenario planning sufficiently address uncertainties outside of the company’s control, such as a second or third wave of infections?
  5. What is the status of the company’s financial relationships with banks? What conditions are the bankers seeking to waive covenant violations or extend more credit?
  6. Are there significant shareholders who are willing to infuse more capital? What form of capital and return on that capital would those shareholders likely require?
  7. What accounting principles and financial reporting standards govern in these circumstances? What does management plan to disclose publicly—in a press release, in the risk factors, in MD&A and in the financial statements? What is the impact on the external auditor’s report?
  8. Does the management team have the right experience and bandwidth or is there a need for supplemental resources?
  9. Has the board addressed its litigation risks, and does it understand the insurance coverages and arrangements required to indemnify individual board members? Does the board need to hire independent advisors?
  10. What is the company’s plan for possible operational or financial restructuring in the near future? When is the right time to prep the board for their role in that effort?

Contact us

Paula Loop

Governance Insights Center Leader, PwC US

Paul DeNicola

Principal, Governance Insights Center, PwC US

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