Independent auditors have been flagging potential financial problems in public Australian companies at a greater rate than during the GFC.
According to analysis by CPA Australia, nearly one-third of all ASX listed companies, including more than half of the bottom 500, faced serious financial uncertainty last year.
The accountants, who analysed nearly 16,000 annual reports from publicly listed companies between 2005 and 2013, say there were more going concern warnings highlighted by independent auditors in 2013 than during the global financial crisis (GFC).
Going concern “emphasis of matter paragraphs” are used by auditors to flag significant uncertainty in a company’s ability to continue in business for the foreseeable future.
Alex Malley, CEO of CPA Australia, says the extraordinary findings are a sobering reminder of the fragility of the Australian economy and the challenges many businesses face.
“We’ve been talking about the potential impacts of the slowdown in China, the strength of the Australian dollar and the effects of the tapering mining boom on the economy for some time,” he says.
“Now, this report, compiled based on virtually all companies listed on the ASX, shows these economic factors are being felt across the market and are putting almost a third of ASX-listed companies at risk of financial catastrophe.
“It really begs the question how our economy would be placed were we to face another shock like the GFC?”
Overall, the trend is similar no matter the size of the company, except in top 200 companies, as the chart below shows:
The first significant rise in warnings was in 2008 during the GFC and the second rise in 2011 or 2012 corresponded to the slowdown in the Australian economy.
The data reveals that going concern warnings jumped most sharply in the energy and mining sectors, where more than 40% of companies are judged.
However, consumer staples, industrials, health care and utilities all experienced an increase in going concern warnings.
“It underscores the simple reality that we have not done enough to fill the void the end of the boom is already leaving in our economy or to address the competitiveness challenges that lay ahead for our nation,” Malley says.
“With nearly a third of companies now having a cloud over them in terms of their financial future, the task is urgent.”
The research team analysed 15,855 company audit reports, representing 98% of ASX-listed companies.