The Sharman Panel of Inquiry, established at the invitation of the Financial Reporting Council (FRC) to consider ‘Going Concern and Liquidity Risks: Lessons for Companies and Auditors’, has published its preliminary report and recommendations.
The panel’s key recommendations, on which it will now consult, are that the FRC should:
- Establish protocols with BIS and other regulatory authorities that will enable it to take a more systematic approach to learning lessons relevant to the scope of its functions when significant companies fail, through assessing the underlying circumstances.
- Harmonise and clarify the common purpose of the going concern assessment and disclosure process in the accounting standards and code.
- Require the going concern assessment process to focus on solvency risks as well as liquidity risks, whatever the business, including identifying risks to the entity’s business model or capital adequacy that could threaten its survival, over a period that has regard to the likely evolution of those risks given the current position in the economic cycle and the dynamics of its own business cycles. It should also include stress tests of liquidity and solvency.
- Move away from a model where the company only highlights going concern risks when there are significant doubts about the entity’s survival, to one which integrates the directors’ going concern reporting with the directors’ discussion of strategy and principal risks.
- Move away from the three category model for auditor reporting on going concern to an explicit statement in the auditor’s report that the auditor is satisfied that, having considered the assessment process, they have nothing to add to the disclosures made by the directors about the robustness of the process and its outcome.
Lord Sharman of Redlynch, chairman of the panel, said: “The aim of these disclosures is to provide information to stakeholders and they should be designed to encourage appropriate behaviours such as good risk decision-making, informing stakeholders about those risks and early identification and attention to economic and financial distress. The report includes recommendations that involve companies, auditors, regulators and government and we look forward to engaging with the widest possible range of stakeholders to build a broad consensus on how to take forward these proposals.”