A panel of inquiry led by Lord Sharman, appointed last year by the UK’s Financial Reporting Council (FRC) to report on the lessons to be learned from recent experience regarding the assessment and management of going concern by companies and auditors, issued its final report on 13 June 2012.
The report of the panel lists 5 recommendations to the FRC in this area as follows:
- Recommendation 1: The FRC should take a more systematic approach to learning lessons relevant to its functions when significant companies fail or suffer significant financial or economic distress but nonetheless survive, for example through selective inquiries conducted by the FRC.
- Recommendation 2: A common international understanding of the purposes of going concern assessment, disclosures and related thresholds and descriptions, should be agreed which should be consistent throughout accounting and auditing standards, in FRS 18 and ISA (UK & Ireland) 570, throughout the UK Corporate Governance Code and related guidance for directors and auditors, and in the UK Listing Rules.
- Recommendation 3: The FRC’s Going Concern and Liquidity Risks: Guidance for Directors of UK Companies should be reviewed to ensure that the going concern assessment is integrated with the directors’ business planning and risk management processes, includes a focus on both solvency and liquidity risks, and includes stress tests both in relation to solvency and liquidity risks that are undertaken with an appropriate level of prudence, with special consideration given to the impact of risks that could cause significant damage to stakeholders.
- Recommendation 4: The FRC should move away from a model where disclosures about going concern risks are only highlighted when there are significant doubts about the entity’s survival, to one where the discussion of a company’s strategy and principal risks always includes the directors’ going concern statement and how they arrived at it, and the audit committee report illustrates the effectiveness of the process undertaken by the directors to evaluate going concern.
- Recommendation 5: The FRC should consider moving UK auditing standards towards inclusion of an explicit statement in the auditor’s report as to whether the auditor has anything to add to or emphasise in relation to the disclosures made by the directors about the directors’ going concern assessment process and outcome.
The panel also considered a number of related issues. For example the panel posed the question whether banks should have a separate going concern disclosure regime and/or a separate financial reporting and auditing regime. But it considered that for various reasons these separate regimes were not necessary.
As regards implementation, the report suggests that implementation of the recommendations should, among other things, be through amendment to the FRC’s Going Concern and Liquidity Risks: Guidance for Directors of UK Companies, the FRC’s Guidance on Audit Committees, and a number of the UK auditing standards.
For a link to the text of the final report of the Sharman inquiry, please click here.