30 January 2013

FRC: Consultation on implementation of Sharman Panel recommendations

The FRC published for consultation guidance for directors, and related standards for auditors, to implement the recommendations of the Sharman Panel of Inquiry into Going Concern and Liquidity Risks. Responses to the consultation questions and other comments are requested by 28 April, 2013.

The Panel was commissioned in March 2011 to identify lessons from the financial crisis and recessionary environment for companies and auditors, addressing going concern and liquidity risks; and to recommend measures, if any, which are necessary to improve the existing reporting regime and related guidance in relation to these matters.
 
The inquiry highlighted the importance of the identification, analysis and management of risk.  It raised questions about the quality of information provided on companies’ financial health and their ability to withstand economic and financial stresses in the short, medium and longer term.
 
The inquiry recommended, and the FRC has concluded, that to improve the robustness and reporting of the going concern assessment, the boards of companies complying with the FRC’s Corporate Governance Code should:

• consider the threats to the company’s business model and capital adequacy, over a period longer than twelve months, looking through the economic cycle and the company’s own business cycle;
• develop a high level of confidence that solvency and liquidity risks can be managed effectively during the period of at least twelve months from approval of the financial statements;
• always disclose the significant risks to the company’s solvency and liquidity and how they are being managed, as part of its discussion of principal risks in the business review; and
• confirm that it has undertaken a robust going concern assessment.

 In addition, auditors should consider the board’s report on the robustness of its assessment and the resulting disclosures in the annual report and confirm in their report that they have nothing to add or to draw attention to.
 
Commenting on the proposals, FRC Chairman Baroness Hogg said: “The work of the Sharman panel has been instrumental in identifying lessons from the financial crisis and providing guidance for directors and standards for auditors going forward. I would personally like to thank Lord Sharman for his work over the past two years and for tackling a very difficult and important issue.”

Lord Sharman commented: “I am pleased that the FRC is launching this consultation to implement our recommendations. The Panel believes these will be radical for many companies but that, if implemented effectively, they will: support better risk decision‐taking; ensure that investors, creditors and other stakeholders are well-protected and informed about the going concern risks; and sustain an environment in which directors recognise, acknowledge and respond to economic and financial distress sooner rather than later.”

The Bank of England provided information about its role and responsibilities that assisted in the development of a supplement to the guidance in relation to the special circumstances of banks. Banks are encouraged to adopt the guidance as soon as possible.

Press release

© FRC