The Financial Reporting Council (FRC) has called for stricter standards when assessing whether an entity is defined as a ‘going concern’.
The report has been published this month after concerns about the quality and rigour of audit around the well-publicised corporate failures of large companies such as HBOS, BHS and Carillion.
The audit watchdog said on several occasions, auditors’ reports have failed to highlight concerns about the prospects of entities which collapsed shortly after, sparking a review into current standards.
As a result, the FRC said any requirements on UK auditors will be “significantly stronger” than those required by international standards.
In proposing its revisions, the FRC has set out three key objectives, summarised below. Each of these proposals can be viewed in greater detail here.
- auditors make greater effort to more robustly challenge management’s assessment of going concern, thoroughly test the adequacy of the supporting evidence, evaluate the risk of management bias, and make greater use of the viability statement;
- improved transparency with a new reporting requirement for the auditor to provide a conclusion on whether management’s assessment is appropriate, and to set out the work they have done in this respect; and
- a stand back requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions ongoing concern.
Commenting on the proposed revisions, Mike Suffield, the FRC’s Acting Executive Director of Audit and Actuarial Regulation said: “Recent corporate failures and the FRC’s own enforcement work has shown the existing Going Concern Standard needs to be strengthened.
“If the UK is to attract high-quality global investment, investors have to have confidence in audited financial statements and the prospects of businesses. Our proposals will significantly expand the work required of auditors – however, we believe this to be an important investment in the quality of the work that underpins what is a cornerstone of audit.
“This revised standard has been designed to better meet the needs of users and protects the public interest.”
The consultation period will close to responses on Friday 14 June 2019.