Watchdog says boards should look for risks on the horizon

 
Marion Dakers
COMPANY boards and auditors need to be more vigilant about long-term risks to financial health, according to tighter rules from the Financial Reporting Council written in the wake of the credit crisis.

The FRC said today it wants directors to consider threats to their business models and capital levels at least a year into the future, and always disclose significant risks to solvency and liquidity.

The regulator’s proposed changes to the UK Corporate Governance Code follow the Sharman Inquiry, which was set up to examine why banks were given clean bills of health in the run-up to the financial crisis.

Lord Sharman said today that while the recommendations “will be radical for many companies”, they should ensure firms make better decisions and that investors, creditors and stakeholders are kept informed.

The new rules should strike a chord with audit committees at UK companies, almost half of whom believe their risk management programmes need to be improved, according to a KPMG survey out yesterday.

Around 39 per cent of audit committee members said their risks planning requires “substantial work”, and a further 10 per cent said they were still drafting or had no formal risk management in place.

Fifty-two per cent said risk management at their company was “robust and mature”, faring better than the global average of 37 per cent (see chart below).

One in five respondents said their company’s risk management plans fail to look far enough into the horizon, while one in ten said they were not happy with their ability to respond quickly to changing risks.

However, the majority (58 per cent) were sceptical about the benefits of forcing firms to retender their external audit contracts.