Accountancy regulator the Financial Reporting Council (FRC) today announced it was beefing up audit standards in response to a string of major corporate failures.
The FRC said it was introducing a new standard related to going concern status, where auditors judge a company’s financial position.
Outsourcer Carillion and department store chain BHS both received clean bills of health from their auditors shortly before they collapsed.
KPMG is being investigated by the regulator in connection with its Carillion audit, while PwC was fined £10m in connection with the BHS audit.
The FRC said it had issued the new standards “in response to recent enforcement cases and well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after.”
The new standard will mean UK auditors “will follow significantly stronger requirements than those required by current international standards”, the FRC said.
The FRC said the new rules required “greater work on the part of the auditor 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”.
The regulator said the new standard would improve transparency, with a new requirement for auditors of public interest entities, listed and large companies to “provide a clear, positive conclusion on whether management’s assessment is appropriate, and to set out the work they have done in this respect”.
The FRC has also introduced a “stand back requirement” to consider all evidence obtained, whether contradictory or corroborative, when the auditor draws their conclusions on going concern.
FRC chief executive Stephen Haddrill said: “High-quality audit protects the public interest, meets the needs of users of financial statements and underpins investor confidence.
“Recent corporate failures have, for good reason, adversely affected that confidence.
“Our own enforcement work has demonstrated a need to strengthen existing going concern standards, which is a fundamental aspect of audit, so that investors can have confidence in audited financial statements and businesses’ financial prospects.”
The FRC itself is being replaced by a new regulator, the Audit, Reporting and Governance Authority (Arga), after it was slammed in a report by Sir John Kingman in December.