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June 10, 2013

Mixed response to separate SME guidance

There has been a mixed response to the UK Financial Reporting Council (FRC)’s announcement last week that it will issue separate, simplified guidance for SMEs when it develops guidance to support the principles advocated by Lord Sharman’s report Going Concern and Liquidity Risks: Lessons for Companies and Auditors.

Ernst & Young stated it supported the key principals of Sharman’s recommendations and continues to believe that improving the transparency and quality of reporting about going concern, both by companies and their auditors is very important to stakeholders and rightly remains a priority for the FRC.

The Big Four firm said it had reservations about the clarity of some of the FRC’s initial proposals and how they might align with related international developments – concerns echoed during the public meeting the FRC organised to discuss its proposals.Hywel Ball, head of assurance, UK & Ireland, at Ernst & Young, said: "The distinction between preparing accounts on a going concern basis, and a company trading as a going concern was unclear. This could make it difficult to compare the disclosures of UK companies with their international peers. Complications might also arise when directors determine whether they have a high level of confidence about the foreseeable future of their business.

"I’m pleased the FRC responded to the feedback they received and look forward to working with them as the consultation and clarification process goes forward."

Ernst & Young canvassed the views of non-executive directors on the FRC’s draft guidance. Almost half of the respondents expressed doubts about the foreseeable future requirement, and they were divided over whether the draft revised guidance would bring any benefits to investors and other company stakeholders.

The Institute of Chartered Accountants of Scotland (ICAS) also welcomed the announcement. It said it had earlier raised concerns that the guidance was not in a clear enough form to be implemented, that timescales were too short and called for a period of transition. ICAS also raised concern that the proposals could risk placing a disproportionate burden on SMEs.

"We are pleased to see that the FRC has taken on board concerns raised by ICAS in our consultation response," ICAS said.

However, Baker Tilly’s head of audit Jane Bleach struck a different note saying: "Although we welcome anything that makes an audit more transparent and accessible for investors, we question whether investors really do require the additional information now included.

"This just provides investors with information about the inputs to the audit process such as the scope of the audit, the risks that had the greatest effect on the overall audit strategy and allocation of audit team resources and audit effort and the level of materiality applied in planning and performing the audit.

"Whilst these are important we think that investors will be more concerned about the outputs from the audit, for example how the auditor has dealt with significant risks, the areas where the auditor has challenged the client, and ultimately the important, often judgemental, issues that the auditor thinks about before signing their report.

"Further down the line we think that these additions will quickly revert to standardised boiler-plate wording that will neither achieve the original objectives of the FRC, nor satisfy the demands of investors.

"We believe that the FRC needs to work closely with the International Auditing and Assurance Standards Board in the future to maintain the international consistency of auditing standards, rather than unilaterally issue changes that just affect UK auditors’ reports and potentially put UK auditors at a competitive disadvantage."

Related articleFRC to issue separate guidance on going concern for SMEs

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