FRC in danger of departing from Sharman recommendations

by Richard Crump

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16 Jan 2014

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A MEMBER of the Sharman inquiry into going concern and liquidity risks has raised issues about how the FRC is implementing the panel's recommendations.

The FRC is currently consulting on proposals that set out how it will implement the recommendations of Lord Sharman's [pictured] 2012 inquiry into going concern as part of changes to the UK corporate governance code that require companies and auditors to be clearer about how solvency and liquidity risks are being managed.

Earlier proposals from the FRC were subjected to a barrage of criticism from the profession that forced the regulator to amend some of the more controversial aspects of its plan - such as making clearer distinctions as to the meaning of going concern.

However, David Pitt-Watson, a key member of the Sharman inquiry, set up by the FRC in 2011 to investigate auditors' shortcomings in the wake of the financial crisis, has warned that the reporting watchdog is in danger of departing from some of the panel's original recommendations.

Pitt-Watson said that a key observation of the panel was that there was some confusion about what going concern meant. At one end there was a common sense interpretation, (that the company could meet it liabilities as they fell due), the other that it was appropriate to use standard accounting rules.

The committee was of the opinion that the common sense interpretation was, de facto, the higher hurdle, and an important one for investors. However, in a final round of consultation, where a large proportion of the respondents were accounting bodies, this position seems to have changed, he claimed.

Now going concern is only to apply to the technical issue of whether it was appropriate to use going concern accounting standards not to the common sense meaning of the phrase.

"It is unclear whether risks which did threaten viability would be separately identified, nor is it clear the directors or the auditor be asked to confirm that, in their best judgement the company was viable, and any caveats they might have to that judgement," Pitt-Watson said in an email seen by Accountancy Age, sent to senior investors and institutional representatives - urging them to take part in the consultation.

Pitt-Watson also noted that the clause requiring directors to report that the business is a going concern has been dropped.

"Investors are the key users of accounting information, yet so far we are not aware of any investors who have responded to the consultation. In particular they may wish to ask that the attestation of going concern continue to be a responsibility of directors and auditors, and that the meaning of going concern be its common sense meaning," Pitt-Watson added.

The FRC said: "Our current proposals resulted from a careful consideration of the substantial adverse feedback from companies, directors and auditors on our January 2013 proposals and was developed with investor input; we particularly welcome investor engagement and feedback; we will listen carefully in reaching any final decision."

The consultation ends next week.

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