Use 'The Lab' to end going concern concerns

IF TWO IS COMPANY and three is a crowd, then accountancy’s regulator will struggle for space if it was to hold a fourth consultation on how to implement Lord Sharman’s guidance on going concern.

Lord Sharman’s original recommendations for a more broad-based going concern assessment, taking into account solvency as well as liquidity risks, have become a recurring nightmare for the FRC. Each consultation has generated criticism about its proposals from investors, preparers and the profession.

Judging by some of the responses to its latest consultation, which formed part of a wider look at the corporate governance code, a fourth consultation – while unlikely – is not out of the question. Iain Richards, head of governance at Threadneedle Investments, said the FRC has failed to recognise the “substance of investors’ concerns and feedback”, while others have questioned the use of an explicit statement about the company’s ongoing viability that is separate to going concern statement.

The reporting watchdog should face some criticism over how implementation of the guidance has been handled – but there is little time now for guidance to be issued ahead of a planned October implementation date, and a fourth consultation and delay would be deeply embarrassing – the difficulty has been in finding a solution to satisfy all parties.

Investors want more information and assurances than company directors are prepared to give, while debate has raged around the meaning of going concern. At this late stage the parties seem as far apart as ever. What the FRC needs to do, in the words of its CEO Stephen Haddrill, is “hold the ring” between investors, companies and preparers.

Take it to the lab

And the FRC has just the place to do this. The FRC’s Financial Reporting Lab was launched in 2011 to provide an environment where investors and companies can discuss reporting issues. The lab has had some notable successes, not least when business secretary Vince Cable adopted many of its recommendations as part of the most comprehensive reforms to the reporting of directors’ remuneration in a decade, such as developing a methodology to calculate a single figure for total pay.

The lab would provide an environment for the kinks in the FRC’s proposals – for the FRC’s plans have been largely endorsed – to be ironed out. It could also give the FRC a reason to avoid providing guidance before October and allow companies to adopt some self-explanatory proposals that can be tested before final guidance is issued.

Getting the lab involved to settle the debate over going concern can hardly be constituted as a success. Finding a solution acceptable to all parties, and nailing down areas that have been problematic ever since the FRC published its original proposals, would save the FRC from embarassment in failing to find consensus among key stakeholders.