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FRC proposals will tighten 'going concern' audit requirements

Out-Law News | 01 Apr 2019 | 12:00 am | 1 min. read

UK accounting regulator the Financial Reporting Council (FRC) has proposed tightening the requirements on auditors when it comes to assessing whether a company is a going concern.

The new measures are a response to a number of corporate failures where clean audit opinions gave no warning of the likelihood of collapse.

"[This] follows concerns about the quality and rigour of audit and well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after as well as findings from recent FRC Enforcement cases," the FRC said.

The proposed revised International Standard on Auditing (UK) 570 and an explanatory note on the key changes aim to make the task of UK auditors significantly more rigorous than required by international standards.

In particular, there are more robust requirements for the auditor to obtain evidence about whether a material uncertainty on going concern exists. The auditor will also have to understand the method used by management to make its going concern assessment, including the oversight exercised by the board, and report how that assessment was evaluated and whether the choice of the going concern basis is appropriate.

The auditor's professional scepticism is to be enhanced, along with consideration of potential "management bias", and inconsistencies between the viability statement and the auditor's knowledge from its audit work must be identified.

Given all this extra audit work, management time responding to these new queries is also likely to increase.    

Meanwhile, the future of the FRC itself is the subject of a UK government consultation changes first proposed by the Kingman Review of the Financial Reporting Council. It recommended that the FRC be reborn with enhanced powers and a new name: the Audit, Reporting and Governance Authority.

Some of the measures in the UK government's consultation will require legislation and in the meantime the FRC will voluntarily implement those that don't need legislation, including new objectives and duties, such as a duty is to "promote brevity, comprehensibility and usefulness in corporate reporting".

The regulator will be given the power to direct changes to a company's accounts, which at the moment can only be done by a court.

The new regulator will review a company's entire annual report, including the corporate governance section, and will be able to pre-clear difficult questions on accounts referred by a company. It will also issue fewer guidance and discussion documents than its predecessor.

Other, more radical, recommendations, such as the introduction of a Sarbanes-Oxley type regime for internal controls, are welcomed by the government and will be explored further.