Going concern shortcomings worry FRC

AN INQUIRY has been launched by the Financial Reporting Council into going concern assessments, and will consider “whether the existing reporting regime and related guidance should be developed”. So how concerned is the FRC with going concern?

With one eye on the FRC’s recent Effective Company Stewardship paper, the panel of the going concern inquiry – headed by Lord Sharman of Redlynch – will look at several key issues.

First among them is the quality of information used to monitor going concern status and liquidity, with a focus on the “adequacy, timeliness and reliability” of data.

The regulator is interested in how company boards – with a particular focus on audit committees – approach the issue, and the best way to incorporate it into other aspects of stewardship and reporting.

In its 2009 Going Concern and Liquidity Risk Guidance, the FRC advised companies without secured financing that this did not necessitate a going concern warning, potentially saving them from spooking investors and sending shares into freefall.
Many industry experts point to these guidelines – published at the height of the financial meltdown – as an example of an effective and timely intervention that prevented panic from toppling companies teetering on the edge.

Loose ends

With this success under their belt, the FRC could use the new inquiry to tie up any loose ends and congratulate itself on a job well done – however, some view the need for the survey in a very different light.

Experts point to inherent flaws in International Acc­ounting Standards, blaming these for the sector’s failure to spot the crisis that derailed the banks in 2008.
IAS1 and IAS39, which regulate the presentation of financial statements and the recognition and measurement of financial instruments, have been criticised for their shortcomings.

They did not prevent banks from being signed off as going concerns despite failed rights issues, credit problems and depositors withdrawing their money.

Could this be the real reason behind the FRC’s new inquiry?

If the underlying regulations are flawed, future going concern issues could slip through the cracks and precipitate a repeat of 2008, when banks’ accounts were signed off weeks before the crash hit.

Deloitte’s recent study, Six of one: Surveying half-yearly financial reporting, found a sharp drop in going concerns among the 130 corporates examined.

While 6% of listed firms were struggling with the issue in 2009/10, none has warned of similar problems in 2010/11.

Industry figures say the results are not wholly surprising, pointing to an increasingly stable commercial and financial environment.

They claim any firm that had going concerns two years ago has either resolved them or entered into insolvency, with fewer lending issues worrying investors and executives.

But a strengthening economy could yet create problems for weakened companies, as workload increases and demand for working capital shoots up. Knowing when and how to report on this could help companies stay solvent, so the need for strong going concern guidelines remains.

And there is still the issue of disclosure as companies, presented with the black-and-white option of issuing a going concern warning or keeping schtum, find it difficult to discuss liquidity issues without sparking a panic.

Rigorous regime

Isobel Sharp, audit partner at Deloitte, says the UK is “ahead of the game” when it comes to going concerns and liquidity risk.

She points, by way of comparison, to the international standards’ measly mention and requirement to disclose only in extreme cases, claiming the UK regime is more open and rigorous than its counterparts.

The financial and commercial environment has undoubtedly improved since the dark days of 2009, but have companies really come so far as to have zero going concern issues?

It remains to be seen whether the FRC will push for effective guidance to steer companies through the post-recession years, or if the temptation to maintain the status quo will prove too strong.