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November 14, 2008

UK profession calls for clear and specific going concern guidance

By Nicholas Moody

Auditors face huge challenges combating uncertainty around going concern in the credit crisis and need guidance from regulators, according to a UK mid-tier leader.

Liquidity is set to become a key issue for companies with December 2008 year-ends, as auditors decide how comfortable banks will be funding businesses over the next few years.

BDO Stoy Hayward managing partner Simon Michaels said audit reports needed to be meaningful, but auditors “were caught between a rock and a hard place”.

“On one hand do they draw out issues around going concern or do they give a company a clean bill of health? What we really need is guidance as soon as possible from the UK Financial Reporting Council (FRC) on going concern statements and how accounts and audit reports should deal with the general risks rising from the economic climate. Without that, uncertainty is going to be compounded,” he said.

Michaels wants specific guidance from the FRC that is tailored to the current financial environment.

“We don’t want to have to qualify accounts if the market can be given some guidance as to how best to deal with some of those challenges, with regards to bank facility letters and comfort on ongoing trading,” he said.

A business is referred to as a going concern if it is able to continue trading for at least the next 12 months. Company management and auditors are required to judge whether the going concern assumption is appropriate. If there is any doubt about the continuation of trading, this must be indicated in the company’s financial statements.

The FRC said it is due to publish some suggested key questions for audit committees imminently. Those questions will address issues such as going concern and liquidity risk.

Shortly after, the FRC will publish a short paper providing an update on issues facing directors for December 2008 year-ends relating to going concern and liquidity risk. This will bring together the current requirements of the Listing Rules, Companies Act (Business review) and IFRS.

KPMG UK chairman John Griffith-Jones welcomed any FRC guidance on going concern and said it “was absolutely an area that requires particular focus”.

Nicholas Moody

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