Investors slam FRC going concern proposals

Investors slam FRC going concern proposals

Plans to water down ongoing viability statements will be “damaging to the public interest”, according to top shareholders

PROPOSED CHANGES to going concern would be “damaging to the public interest” if implemented, top investors have warned.

Nine of the UK’s most prominent shareholder representatives, including Royal London Asset Management (RLAM), Legal & General Investment Management (LGIM) and the Local Authority Pension Fund Forum (LAPFF), criticised the reporting watchdog’s plans to water down the ongoing viability statement.

The most recent consultation into going concern, included alongside wider UK Corporate Governance Code changes, closed last week. The FRC was forced to seek stakeholder opinion for a third time after its previous attempts to interpret the Sharman Review’s findings were rejected.

In a letter to the Financial Times, investors accused the regulator of “perversely” proposing changes to the longer-term viability statement that “run contrary” to the aims of the Sharman Review.

They said: “Ensuring that directors of a company make a positive assertion to those providing capital about the business’s solvency is surely the least one might expect. However, the FRC’s proposal to amend the going concern statement has stirred up heated debate, with directors and audit firms arguing that it is not reasonable to expect them to offer a commitment on the future solvency of the business.

“We disagree with the FRC proposal. The directors’ obligations – and ultimately their accountability – to shareholders, revolve around just this commitment.”

The investor group stressed directors’ going concern statements would not be “a guarantee”, as they should continue to benefit from safe harbour provisions.

Bank failures in the financial crisis demonstrated the lack of clarity and responsibility demonstrated by boards and auditors over going concern, the investors said.”Clear lines of accountability are a vital part of driving prudent behaviour, which requires giving due regard to protecting shareholder capital,” they added.

If accepted by other respondents, changes to going concern will go live in October this year, along with amendments to remuneration policy in the governance regulations.

In January, David Pitt-Watson, a key member of the Sharman inquiry, warned that the FRC was in danger of departing from some of the panel’s original recommendations. In an email sent to investors and institutional representatives seen by Accountancy Age, Pitt-Watson urged them to take part in the consultation after the definition of going concern had drifted from its common sense meaning to one that only applies to its technical use.

 

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