Celtel is a large telecommunications company that is listed on the Nairobi Stock Exchange. It is highly geared because, like many such companies, it borrowed a large sum to pay for a license to operate a mobile phone network with technology that has not proved popular. The company‘s share price has dropped by 50% during the last three years and there have been several changes of senior management during that period. There has been considerable speculation in the press over the last six months about whether the company can survive without being taken over by a rival. There have been three approaches made to the company by other companies regarding a possible takeover but all have failed, mainly because the bidders pulled out of the deal as a result of the drop in share prices generally. The company has net assets, but has found it necessary to severely curtail its capital investment program. Some commentators consider this to be fundamental to the future growth of the business, others consider that the existing business is fundamentally sound. It has also been necessary for the company to restructure its finances. Detailed disclosures of all of these matters have always been made in the financial statements. No reference has been made to the going concern status of the company in previous auditor‘s reports on financial statements and the deterioration in circumstances in the current year is no worse than it has been in previous years.Required: a) On the basis of the information provided above, describe the audit report that you consider is likely to be issued in the case of Celtel, giving reasons. b) Explain the difficulties that would be faced by Celtel and its auditors if Celtel‘s audit report made reference to going concern issues

Report issued to Celtel

(i) In the case of Celtel, there are some indicators of going concern problems. However, the company may still be a going concern and the fact that the company has been approached by take-over bidders does not necessarily mean that there is a going concern problem (possibly quite the opposite).

  • (ii) The audit opinion issued on Celtel in the current year is not likely to make reference to the going concern status of the company, as in previous years. The situation has not deteriorated significantly in the current year and it will be difficult for auditors to justify any change in their opinion from previous years.Difficulties dassociated with reporting on going concern

(i) If the auditors of Celtel were to report on a going concern problem, the mere act of reporting might of itself create a going concern problem (a ‗self-fulfilling prophecy‘). This is particularly the case with large ‗blue-chip‘ companies where the issue of an audit report that is modified in any way is unusual and might well cause the company‘s share price to drop, thus precipitating a going concern problem.

(ii) This means that it is very difficult for companies such as Celtel and their auditors to send out any clear signal to the markets without running the risk of creating a panic.

(iii) However, recent events show that the consequences of companies and auditors failing to report where severe financial difficulties are encountered can be disastrous for both the company (its employees and shareholders) and auditors alike.

(iv) Auditors are failing in their professional duties if they do not report on going concern problems of which they are aware; however, situations involving large companies are rarely clear cut and auditors who propose to make any changes at all to the audit report are likely to encounter fierce resistance from management who may genuinely believe that to make such a report would be wrong.
(v) In the company‘s annual financial statements, it is not the place of the auditor of Celtel to substitute his judgement for that of directors. However, where large companies involved in complex financing arrangements are concerned, auditors may have to fight hard against vested and powerful interests if they disagree with the directors‘ judgements and decide to make reference to the matter in the auditor‘s report. An auditor making reference to going concern issues in an audit report in such circumstances may lose the audit (and any other work) and may run a significant risk of litigation.



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