Going concern review

Executives from the Financial Reporting Council (FRC) are due in front of a House of Lords committee later today to face a grilling over controversial proposals on going concern, as the regulator attempts to implement recommendations from the Sharman inquiry designed to improve accountability say Harris & Co accountants Northampton #accountantsnorthampton

FRC chairman Sir Win Bischoff and chief executive Stephen Haddrill will face members of the House of Lords economic committee at 3.30pm this afternoon, where they will answer questions on the issues around statements of going concern and wider corporate governance matters.

In the wake of the Sharman Panel, which was set up in 2011 to examine the corporate governance and reporting lessons to be learnt from the failure of ostensibly healthy businesses in the financial crisis, the FRC has indicated it intends to ‘raise the bar’ for risk management.

The regulator 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. There will also be a requirement 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", and to consider and report if they are aware of any material matter in connection with the disclosure of principal risks that should be disclosed.

The new rules also require companies to state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. The FRC says it is expected that the period assessed will be significantly longer than 12 months.

In addition, companies will be required to carry out, at least annually, a review of their effectiveness risk management and internal control systems, and report on that review in the annual report.

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.

The proposals have attracted considerable comment and controversy. Earlier this month a group of investors representing some £743bn of assets under management said that proposed changes to the corporate governance code would weaken the assurances a company’s directors must currently give shareholders about its ongoing viability, in a letter sent to the Financial Times.