Julia Irvine 4 Mar 2019 05:07pm

FRC ups the ante on going concern

UK auditors will have to meet stringent new requirements when they come to assess whether a company is a going concern, if proposals from the Financial Reporting Council (FRC) are approved

The regulator has revised the current UK version of the international auditing standard (ISA 570) on going concern and in doing so has come up with provisions that go way beyond those set out in international standards.

It explains that going concern is one of the fundamental principles in the preparation of financial statements. Yet the collapse of large companies such as HBOS, BHS and Carillion raised questions about why these companies had received clean audit reports that failed to warn about their impending fate.

Other enforcement cases, such as AssetCo plc, also flagged up issues relating to going concern, “raising further concerns about the effectiveness of auditors work” on the subject.

Because of the worries about the inadequacy of ISA 570 and since the International Auditing and Assurance Standards Board, which wrote the original standard, has no plans to revise it any time soon, the FRC decided to go ahead with the revisions alone.

“Given the fundamental importance of going concern in a set of financial statements and the findings arising from a number of the FRC’s enforcement cases, the FRC believes it is in the public interest to now propose revisions to this standard with the view to driving necessary improvements in audit quality,” it wrote in the consultation paper.

The revisions are intended to: foster in the auditor an appropriately independent and challenging mindset by reinforcing professional scepticism when challenging management’s assertion of going concern; enhance auditor reporting and make the audit process more transparent so that investors and other stakeholders gain greater insight; enhance documentation of the auditor’s judgments; keep ISAs (UK) fit for purpose; and reinforce the need for robust communication and interactions during the audit.

Commenting on the proposed new requirements, Mike Suffield, the FRC’s acting executive director of audit and actuarial regulation, said, “If the UK is to attract high-quality global investment, investors have to have confidence in audited financial statements and the prospects of businesses.”

He admitted that the proposals would significantly expand the auditor’s workload but felt that this was necessary. “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 move has been generally welcomed by the audit profession. “This is an area that is critical to the quest to improve trust in audit and we welcome the further debate, " said Nigel Sleigh-Johnson, ICAEW's head of financial reporting, audit and assurance.

"On the whole, the changes seem sensible, but more is likely to be necessary to close the so-called expectations gap in this area. I would stress the importance of aligning any improvements with the outcome of the ongoing independent review by Sir Donald Brydon into the quality and effectiveness of audit.”

A KPMG spokesperson said, “As a firm, we are advocates of providing further disclosures to shareholders around how we arrived at our audit opinion. For example, we are introducing graduated audit findings as standard into our audits for public interest entities, which will give investors far more insight and information into how we come to our opinions.

“In addition, this audit season we have enhanced the information we provide in our audit reports by highlighting the key risks we considered when carrying out our work on the going concern basis of accounting.”

Both PwC and EY added that they would review the consultation document and consider the implications for their business and audit clients.

The deadline for comments is 14 June.