FRC to raise bar on risk management post-Sharma

The Financial Reporting Council (FRC) is to consult on plans to bring together its previous guidance on risk management and internal control with the assessment of the going concern basis of accounting to create an integrated approach to the assessment and reporting of the risk, reports small business acccountants Harris & Co.

This will involve changes to the UK Corporate Governance Code, new guidance for boards of listed companies and new standards for auditors covering risk management and reporting. Supplementary guidance for directors of all banks is also being issued. The FRC says the aim is to ‘raise the bar’ for risk management by boards and communication to the providers of risk capital.

The proposals are in response to the recommendations of Lord Sharman’s 2012 inquiry, Going Concern and Liquidity Risks: Lessons for companies and auditors, which looked at the corporate governance and reporting lessons to be learnt from the failure of ostensibly healthy businesses in the financial crisis.

Melanie McLaren, FRC executive director, codes and standards, said:

‘The new guidance, and the proposed changes to the Code, highlight the issues that boards need to consider when assessing and managing risk, crucially including risks to solvency and liquidity. We have placed considerable emphasis on the need for robust assessment by boards and on the important role of auditors in ensuring reliable communication to investors.’

The FRC is proposing a new Corporate Governance Code provision and related guidance about the need for a robust assessment by companies of how they manage or mitigate their principal risks, which will now include risks to solvency and liquidity, and to explain which if any of those risks have also given rise to material uncertainties for the purposes of reporting on the company’s going concern basis of accounting.

Under the proposals, auditors will be required, to consider whether reporting is ‘fair, balanced and understandable’, to consider and report if they are aware of any material matter in connection with the disclosure of principal risks that should be disclosed.

As a result, the current Code provision requiring listed companies to make a ‘going concern’ statement will be removed. The FRC says this statement focuses on the narrow meaning of assessing the going concern basis of accounting, and so detracts from the broader integrated assessment and description of solvency and liquidity risks envisaged by Lord Sharman. An earlier consultation suggested this ‘dual use’ of the phrase was likely to cause difficulty.

The FRC is also consulting on updates to existing guidance to directors that a conclusion that a bank is or would be reliant, in stressed circumstances, on access to liquidity support from central banks that is reasonably assured, does not necessarily mean that the bank is not a going concern or that material uncertainty disclosures or an auditor’s emphasis of matter paragraph are required.

The FRC says that negative feedback received on plans to extend the proposals to unlisted entities means it now plans to consult in 2014 separately on draft guidance for directors of such companies. It is currently considering the development of simpler and more proportionate guidance.

The consultation closes on 24 January 2014, and the revised Code, guidance and standards are likely to be issued mid-2014 with application for financial years beginning on or after 1 October 2014.