FRC to launch new consultation on going concern

THE FRC is to launch a new public consultation on its controversial attempts to implement Lord Sharman’s guidance on going concern, following criticism from investors and a key member of original panel of inquiry.

The UK reporting watchdog has consulted on going concern – a principle in accounting that assumes a company will continue to operate in the foreseeable future – for the second time earlier this year. However, it has admitted to Financial Director that it plans to launch a fresh consultation in response to what it describes as “investor concerns”.

Lord Sharman’s investigation into going concern was set up in 2011 to look at audit and financial reporting shortcomings in the wake of the financial crisis, particularly how banks’ disclosures were given a clean bill of health by auditors before subsequently needing to be bailed out by the state.

The original recommendations, published in 2012, for a more broad-based going concern assessment that takes into account solvency as well as liquidity risks, received widespread support from the profession. However, the FRC has struggled to implement the panel’s recommendations.

“We have listened to concerns raised by investors in response to our public consultation earlier this year and are reflecting on the range of feedback received to develop proposals for further public consultation, which will be discussed with the board in early April when it considers the 2014 update of the corporate governance code,” the FRC told Financial Director.

The FRC’s most recent consultation, which combines Sharman’s recommendations with wider changes to how companies and auditors disclose risks in annual reports, was itself launched in response to a barrage of criticism from the profession about how the meaning of going concern was defined.

Critics of the original proposals had warned that the FRC’s definition of going concern had “blurred the distinction” between the stewardship and accounting purposes of the assessment and that confusion would arise as a result.

In response, the FRC attempted to make a clearer distinctions as to the meaning of going concern and has sought to combine previous guidance on risk management and internal control with the assessment of the going concern basis of accounting as part of changes to the UK corporate governance code.

In January however, 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 sister title 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.

The panel was of the opinion that the common sense interpretation was, de facto, the higher hurdle, and an important one for investors. However, in the most recent round of consultation, where a large proportion of the respondents were accounting bodies, this position changed, he claimed at the time.
Now going concern is only to apply to the technical issue of whether it was appropriate to use going concern accounting standards, not to the common sense meaning of the phrase.

“It is unclear whether risks which did threaten viability would be separately identified, nor is it clear the directors or the auditor be asked to confirm that, in their best judgement the company was viable, and any caveats they might have to that judgement,” Pitt-Watson said in the email.