Key lessons for directors and auditors on reporting short term liquidity risks and longer term solvency risks
The Sharman Panel of Inquiry on “Going Concern and Liquidity Risk: Lessons for companies and auditors” today issued its preliminary report and recommendations. As we reported in this post of March 2011 and this post of May 2011, the Inquiry was set up by the Financial Reporting Council (the FRC) to consider:
- How companies ensure the adequacy, timeliness and reliability of the internal information used to monitor going concern and liquidity risk; and
- Whether the going concern and liquidity risk disclosures required by IFRS, the UK Corporate Governance Code and the Listing Rules provide timely and relevant information for all stakeholders.
The Inquiry’s key recommendations, as summarised in the accompanying press release, are that the FRC should:
- 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.
- 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.
The FRC will now consult on these preliminary recommendations until the end of 2011, with the Sharman Panel intending to issue a final version of its recommendations in February 2012. That final version will also inform the FRC’s broader work on company reporting and audit – we discussed the latest developments on that in this postof September 2011.
UPDATE 14 June 2012: The Sharman Inquiry has now published its final report, as we cover here.
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