The Sharman panel, established at the invitation of the FRC, has reported on its inquiry into going concern and liquidity risks, setting out its recommendations in order to improve the management of these risks in future.
Lord Sharman noted that the aim of the directors’ assessment and reporting of going concern risks is not primarily to inform outsiders of distress, but to ensure that the company is managed to avoid such distress whilst still taking well-judged risks.
The panel’s recommendations to the FRC included:
- Taking a more systematic approach to learning lessons when significant companies fail or suffer significant financial or economic distress (such as by undertaking selective inquiries).
- Working with international bodies to agree a common international understanding of them purpose of the going concern assessment and financial statement disclosure about going concern.
- Reviewing the Guidance for Directors to ensure that the going concern assessment is integrated with the directors’ business planning and risk management processes – including a focus on both solvency and liquidity risks.
- Moving 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 which integrates going concern reporting with the Effective Company Stewardship proposals.
- Amending 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 disclosure made by directors about the robustness of the going concern process and its outcome.
The FRC has yet to set out its proposals for implementation of these proposals. It is likely that an impact assessment will be required.