Going concern ‘not a guarantee of success’

GOING CONCERN GUIDELINES are broadly positive, though more education on what the status means is essential, according to respondents to the recently closed Sharman Inquiry.

At the height of the credit crisis, the Financial Reporting Council issued guidelines on going concern and liquidity risks, hoping to clarify reporting requirements and calm investor fears.

Its recent inquiry led by Lord Sharman, chairman of Aviva and Liberal Democrat spokesman for trade and industry, aimed to identify lessons from the financial crisis and ensure that the popular going concern guidelines retain their value.

Sharman inquiry secretary and head of the FRC’s Auditing Practices Board, Marek Grabowski, said the inquiry had a “good” response, with about 60 written submissions received. At the same time, the panel continues to hold meetings with stakeholders who prefer not to reply in writing, such as foreign regulators and investor groups.

Grabowksi said the inquiry has received “a large number of distinct ideas for doing things differently” and is in discussion with those whose suggestions merit further thought.

Firms were keen to dispel the “myth” that a going concern status is a guarantee of future success, saying user education is needed in this area.

Some stakeholders pointed out that, under the UK regime, the minimum going concern review period is longer than any other country – 12 months from the date of financial statement approval – rather than 12 months from the balance sheet date as required under international accounting standards.

For some, this requirement is “onerous”, whereas others urged international standards to be brought in line with the UK’s, saying this change would make the test “more demanding but more realistic”.

The message on going concern was generally positive but respondents remain concerned that auditor opinions meet user expectations and understanding, saying that more consultation and work is needed in this area.

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Fiona Westwood of Smith and Williamson.