FRC strengthens Going Concern audit standard

FRC strengthens Going Concern audit standard

The Financial Reporting Council (FRC) has strengthened its Going Concern audit standard.

The FRC revised its Going Concern standard in response to recent enforcement cases and well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after.

By strengthening its Going Concern audit standard, auditors will be forced to apply more meticulous checks when assessing companies and judging whether they have the resources and capabilities to continue operating, after being criticised for any high-profile corporate failures.

The changes are in response to the failure of companies such as BHS and Carillion, which received clean audits just months before their collapse. Auditors have since been slammed for failing to question management assessments that the companies were “going concerns”.

The FRC was also criticised for a perceived light-touch approach and is being replaced by a new watchdog — the Audit, Reporting and Governance Authority.

Under the new audit standard, auditors will have to take much more responsibility for judgments of viability and will not be allowed to take directors’ assurances at face value.

Audit firms operating in the UK will follow a stronger approach than that required in other developed economies, according to the Audit, Reporting and Governance Authority.

The new rules will force auditors to “thoroughly test” supporting evidence provided by management, to be more transparent about audits and to provide a “clear, positive” statement explaining why they deem a company to be a “going concern”.

Auditors will also have to say whether they agree with directors’ assertions that a company could stay in business and they must demonstrate how they reached this conclusion.

Stephen Haddrill, FRC chief executive, said: “High-quality audit protects the public interest, meets the needs of users of financial statements and underpins investor confidence. Recent corporate failures have, for good reason, adversely affected that confidence.

“Our own Enforcement work has demonstrated a need to strengthen existing Going Concern standards, which is a fundamental aspect of audit, so that investors can have confidence in audited financial statements and businesses’ financial prospects.”

The revised Going Concern Standard can be found here.

Share icon
Share this article: