Directors should provide more disclosure on
how they arrive at their going concern and liquidity risk
conclusions, according to the UK Financial Reporting Council’s
(FRC) Sharman panel report.

The report, Going Concern and Liquidity
Risks: Lessons for companies and auditors
, recommends that to
improve risk management, stakeholders should be given more
information about risks with early identification and attention to
economic and financial distress.

Currently the company has to only highlight
going concern risks when there are significant doubts about the
entity’s survival, meaning very few verdicts of ‘not a going
concern’ are given. For this reason the report has called for
a stronger focus on solvency and liquidity issues as well.

The inquiry, led by former KPMG global
chairman and current Aviva group chair Colin Sharman, was launched
in March and focused on the lessons learned during the financial

Sharman also said the International Accounting
Standards Board should consider amending IAS 1 to bring it into
line with the FRC’s Effective Company Stewardship Code.

Lastly, the report proposed moving 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.

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“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,” Sharman

FRC chief executive Stephen Haddrill said the
management and disclosure of key risks is an essential part of the
role of an effective company board and “there is a clear connection
between Sharman’s work and proposals from UK Government and the

“I hope the consultation period will provide a
useful opportunity to assess how they fit together to improve both
the quality of corporate reporting and the dialogue between
investors and company boards,” Haddrill concluded.