REMEMBER THE DARK days of 2008? So dark were they that many finance directors could not see ahead more than a few months, let alone a year. This played havoc with going concern and liquidity reports required for companies’ financial statements.
But the Financial Reporting Council (FRC) moved swiftly to provide guidance for directors, audit committees and auditors to ensure investors were able to understand fully the exceptional risks that were being faced at the time.
This guidance was updated in 2009, and now that the dust has settled the FRC has asked Lord Sharman to review the current going concern reporting landscape.
Sharman, Aviva’s chairman and former international head of KPMG, is now sifting through comments from directors, investors, regulators and auditors gathered as part of this review. In his call for evidence, Sharman set out a number of areas of focus. These included the transparency, process and assessment of the reports, and whether any changes to current guidance are needed.
The FRC guidance has resulted in a significant increase in the level of disclosures made by companies in their financial statements, and this level is set to be maintained. Martyn Jones, national audit technical partner at Deloitte, agrees that the effort put into the disclosures during the extraordinary times of the financial crisis are now set to be “business as usual” – there will be no going back.
“There is no doubt that the guidance issued in 2008 and 2009 had an impact on the amount of work done by directors,” says Jones. “Clearly, the level of work is dependent on the level of going concern and liquidity risk that an entity might have, but the level of consideration is huge,” he says, adding that audit committees are also “all over this”.
As Geoff Swales, a director in PwC’s assurance risk and quality group, says: “Directors and auditors are continuing at the level of effort and concern they had a couple of years ago. The economic situation is still difficult and I don’t think things have eased off since 2008 in any way.”
Swales suggests a number of areas where directors should be focusing their attention. “The key things are around the company’s forecasts and budgets, and whether they have done those in a sensible and thorough way,” he says. Directors will need to have a clear view of their particular markets. They will also need a clear understanding of their cashflows, and they will need to weigh their budgets against financing facilities.
“As auditors, we will be looking at the quality of their processes and their past history of reliability,” says Swales.
“This may mean that, at some point during the going concern review period, they will be tight up against their banking covenants. If this is the case, what mitigating actions do they have, what could they do if their forecasts turn out to be more optimistic? We would expect directors to be specific about possible cost savings and whether they are achievable,” adds Swales, “and whether they have started talking to their banks if they are going to break their covenants.”
All of this means more work for finance directors. “FDs will continue to focus on business models, relevant risks, appropriate monitoring procedures, and ensuring the strategies and processes in place are commensurate with the risks,” says Jones.
Sharman is due to publish preliminary findings this summer, with the intention of providing a full report by the end of the year. One area that Jones is keen to see addressed is the international dimension of the guidance. “I would like to think that the sensible material included in the FRC’s guidance will get considered more widely on a global basis,” he says. ?
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