Britain’s accounting watchdog unveiled plans to make auditors apply more robust checks when reviewing whether a company was likely to continue operating in response to several high-profile corporate failures that have undermined confidence in business.
The Financial Reporting Council on Monday said it wanted auditors to do more when reviewing whether a company was a “going concern” and likely to remain in business for another year, highlighting the collapses of construction group Carillion and retailer BHS as key factors behind the decision.
The regulator said auditors should challenge corporate management teams “more robustly” and “thoroughly test” the adequacy of the evidence put forward by company directors.
It also wanted auditors to set out in financial statements whether they believed management assessments with respect to going concern judgments were appropriate, and to explain how they came to that conclusion.
An FRC document setting out the proposals — which will be consulted on until June — said the collapse of BHS and Carillion, as well as failed UK lender HBOS during the financial crisis, had “brought into question why such companies had clean auditor’s opinions, which included no warnings that the companies were at risk of collapse”.
The regulator additionally highlighted its investigation into Grant Thornton’s audit of AssetCo, which resulted in a £2.3m penalty for the audit firm in 2017, in part for its approach to assessing the going concern assumptions made by the fire and rescue business.
Mike Suffield, the FRC’s acting executive director of audit regulation said: “Recent corporate failures and the FRC’s own enforcement work has shown the existing [going concern requirements] needs to be strengthened.
“Our proposals will significantly expand the work required of auditors — however, we believe this to be an important investment in the quality of the work that underpins what is a cornerstone of audit.”
The proposals were met with a muted response from both auditors and critics of the audit market. A partner at one of the largest firms said the measures were “too little, too late”. “Something like this could have been done a long time ago, and it doesn’t go far enough,” he said.
Karthik Ramanna, professor of business and public policy at the University of Oxford’s Blavatnik School of Government, said: “The implication of these proposals is that auditors missed key red flags due to weak auditing standards. The real issue isn’t that the auditors need more technical guidance but rather that they are conflicted in their dual roles as watchdog and consultant.”
KPMG, which audited Carillion and HBOS, said it had already increased how much information it provided in audit reports this year by highlighting the key risks the firm considered when “carrying out work on the going concern basis of accounting”.
KPMG added: “It is vital that as a profession, we examine all possible avenues to improve public trust both in audit, and the wider corporate landscape. We welcome the FRC’s consultation into the standards governing our work around going concern, and how we report on that work to shareholders.”
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