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June 12, 2012

Sharman panel hands down ‘going concern’ recommendations

The UK Financial Reporting Council (FRC) should clarify and harmonise the different definitions of a ‘going concern’ and related risks in accounting, auditing and governance requirements, according to an inquiry into going concern and liquidity risk.

The Sharman panel report suggests the FRC should review its guidance for directors to ensure going concern assessments are integrated with business planning and risk management.

The panel would also like to see going concern reporting integrated with Effective Company Stewardship proposals issued by the FRC.

The FRC should enhance the role of the auditor and encourage the auditor’s report to disclose any issues in the process of assessing a going concern and its outcomes.

The panel’s chairman, Lord Sharman, said the final recommendations aim to refocus the going concern process to support better risk decision-taking, ensure investors and stakeholders are well-protected and informed about risks, and directors recognise and respond to economic and financial distress sooner rather than later.

FRC chief executive Stephen Haddrill said the regulator will now embark on a careful consideration of the most effective way to take these findings forward so as to improve the quality of corporate reporting and dialogue between investors and company boards.

“The FRC reform has been designed partly to enable us to respond positively to the panel’s recommendation that we take a more systematic approach to learning lessons when significant companies fail,” he said.

PwC UK head of public policy and regulatory affairs Pauline Wallace welcomed the findings and said going concern will be a key topic for the enhanced dialogue between banks, their auditors and the regulators.

“Going concern risks remain at the forefront, in light of the continuing difficulties caused by the sovereign debt crisis. Preparers, auditors, the FRC and bank regulators will need to study carefully and reflect on the Panel’s observations on banks and going concern due to the evolving environment in Europe,” Wallace said.

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