COMPANIES and auditors should be clearer about the risks that could threaten the business when they report to investors, the accounting watchdog said yesterday.
The Financial Reporting Council want firms to say more than just whether they can function for the next 12 months as a “going concern”.
Auditors will continue to sign off a company is a “going concern” but will also have to disclose if they feel any risks to solvency and liquidity have not been fully described or properly addressed by the firm.
The regulator is trying to prevent a repeat of the corporate collapses of the financial crisis, when businesses that had been signed off by their boards and accountants subsequently went bust.
“What we are trying to do is give rise to a step change in some companies in terms of the robustness and depth of the assessment they make about solvency and liquidity risk,” said Melanie McLaren, FRC executive director for codes and standards.
The FRC’s plans, which will be put to the accounting industry for consultation and enforced from October 2014, have been set out in light of a report put together last year by Lord Sharman on testing companies’ financial health.
“We expect that investors and other stakeholders will appreciate this, including the proposal which encourages boards to explain how any significant failings or weaknesses in risk management and internal control are being addressed,” said Hywel Ball, head of assurance and Ernst & Young.
“But only time will tell whether this proposal, if implemented, results in lengthy or boilerplate disclosures.”
The Institute of Chartered Accountants in England and Wales cautioned that any rule changes must fit in with reporting requirements in the US.