Auditors' going concern judgment to extend beyond 12 months

AUDITORS will have to determine companies' ongoing financial health over a longer period of time and under wider criteria, according to draft proposals put forward by the Financial Reporting Council (FRC).

The UK reporting watchdog has said that accountants would have to consider threats to clients' business model and capital adequacy through the economic cycle and the companies' own business cycle.

Auditors only attest to a company as a going concern, meaning it has enough cash or access to capital to survive for the following 12 months, but this will be extended to a period longer than a year under the FRC's new guidelines, which remain subject to consultation.

In addition, the FRC said auditors must be confident that a company's solvency and liquidity risks can be managed for at least a year, that there has been a "robust" going concern assessment, and they must disclose how the risks are being managed.

The recommendations, which would apply to all listed companies that must be audited, are in response to Lord Sharman's inquiry into going concern and liquidity risks.

The panel was set up by the FRC in 2011 to investigate auditors' shortcomings in the wake of the financial crisis, particularly how banks' accounts were given the all clear by auditors before subsequently needing to be bailed out by taxpayers' funds.

Lord Sharman said the proposals would be radical for many companies, but "if implemented effectively, they will: support better risk decision‐taking; ensure that investors, creditors and other stakeholders are well‐protected and informed about the going concern risks; and sustain an environment in which directors recognise, acknowledge and respond to economic and financial distress sooner rather than later."

However, KPMG has warned that the FRC may be setting companies a "high hurdle" by forcing them to consider whether they are a going concern over the general economic cycle.

"My concern is that it will be difficult for many companies to meet what appears to be such a tough test," said Tony Cates, head of audit at KPMG.

The consultation is open for comments until 28 April 2013.