FRC in danger of departing from Sharman recommendations

by Richard Crump

More from this author

16 Jan 2014

  • Comments

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.

Visitor comments

blog comments powered by Disqus

Add your comment

We won't publish your address

By submitting a comment you agree to abide by our Terms & Conditions

Your comment will be moderated before publication

  • Send



Conservatoire for Dance and Drama, London, Permanent, Part Time, £60,000 pro rata




Get the latest financial news sent directly to your inbox

  • Best Practice
  • Business
  • Daily Newsletter
  • Essentials


Search for jobs
Click to search our database of all the latest accountancy roles

Create a profile
Click to set up your profile and let the best recruiters find you

Jobs by email
Sign up to receive regular updates with the latest roles suitable for you



Why budgeting fails: One management system is not enough

If budgeting is to have any value at all, it needs a radical overhaul. In today's dynamic marketplace, budgeting can no longer serve as a company's only management system; it must integrate with and support dedicated strategy management systems, process improvement systems, and the like. In this paper, Professor Peter Horvath and Dr Ralf Sauter present what's wrong with the current approach to budgeting and how to fix it.


iXBRL: Taking stock. Looking forward

In this white paper CCH provide checklists to help accountants and finance professionals both in practice and in business examine these issues and make plans. Also includes a case study of a large commercial organisation working through the first year of mandatory iXBRL filing.