Auditors: decision time

The guidance from the FRC requiring audit committees to consider the impact
of their auditor leaving the market missed the point.

It is far better to plan to avoid a crash than to plan to deal with the
consequences when it does happen and there are two urgent actions that could
help: clear guidance on reporting in the current economic climate and a review
of the auditor limited liability rules.

The world has moved on since the MPG recommendations were published, although
choice remains an unsolved problem in the audit market. Financial statements and
audit reports need to be meaningful in a climate where there is significant
doubt about the ability of any company to continue as a going concern,
particularly, when banks are unwilling ­ or unable ­ to confirm renewed

As the government has committed billions to revive illiquid markets there is
still doubt about the impact it will have for businesses seeking to renew
current or negotiate new facilities with their banks.

Companies need to ensure they inform stakeholders of the risks they face in
such a way that is clear and informative. Auditors currently need to consider
whether all uncertainties have been adequately described and, if not, consider
some form of qualified report. Where a significant uncertainty surrounds a
future event this is noted as an emphasis to the audit opinion.

The danger is that auditors will be caught between issuing reports that are
either qualified or draw attention to uncertainties and these lead to a
self-fulfilling prophesy and corporate failure, or give clean reports only to
find that companies fail in the next 12 months. Either way, the auditor will be

Auditors face the challenge of trying to judge whether companies will remain
as going concerns.
Clear guidance is now urgently required about how accounts and audit reports
should deal with the general risks arising from the economic climate.

The limited liability regime change, introduced in the Companies Act earlier
this year, has undoubtedly stalled. It is therefore time to review this
position. The current law permits auditors to limit liability by contract but
there seems to be significant resistance to this from company boards and other
regulators. Maybe it is time to consider limitation by statute.

Graham Clayworth is an audit partner at BDO Stoy

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