FRC toughens going concern requirements: Part 1
In light of recent criticism aimed squarely at the auditing profession, the FRC has beefed up its going concern requirements for audits commencing 15 December. In the first of a two-part series, Steve Collings takes a look at some of the changes.
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Absolute Magic. That'll sort out all the problems then. Just what was needed - a few more tick boxes and we are saved.
That'll stop the Carillions, Thomas Cooks et al. won't it? Won't it?
The FRC are really star aren't they? Fantastic performance to solve all the problems just like that.
Could they dream up a few tick boxes for Brexit so we can get that settled as well?
I think we all need a few more regs to comply with so that we really don't have to think about anything seriously.
Hooray for regulation - where would we be without it - might have to use our brains.
When will we grasp the nettle and address the real problem ?
It does not matter how many times FRC tweak their standards, the ‘top’ audit firms simply ignore them with impunity. This is because FRC are dominated by the ‘top firms’ and its a case of the tail wagging the dog.
Until FRC are reformed properly and become independent of audit firms then massive corporate collapses in the UK will continue.
The answer is simple - the top firms audit wings should be broken up and smaller firms - who are properly independent - should be allowed to the audit table.
There is an underlying problem with the way uncertainty is dealt with in the going concern basis decision. The company is required to decide whether or not the going concern basis is applicable. It's a black and white question, but in reality there are shades of grey. Our probability of not being a going concern fluctuates over time, usually being very, very low but occasionally rising a bit - or a lot.
The effect of the auditor insisting on the alternative basis might be that it precipitates, perhaps unnecessarily, the very outcome everyone wants to avoid. That's a reason why everyone involved with the audit wants things to be rosy.
So, one thing that might help here is to revise the decision and the action. Require companies to state their probability of failure and to show the financial effects of such failure on their financial statements (as they would if not a going concern) regardless of what that probability is.
In addition to taking the pressure off auditors it would provide more information to investors and readers. They could reach their own probability of failure, if they want to, in combination with the company's assessment of the effects on the statements.
Quite right. One can foresee the danger of a self-fulfilling prophecy - a doubt caused by a potential problem may exist but what weight does the auditor give to it? If it is over-emphasised then people would look at it and say to themselves "We had better watch this one and cut back the loans/credit etc." The possibility suddenly becomes a probability and the Company may be unnecessarily imperilled.
Of course it might work the other way too and save a loss to creditors, but what a fine judgement to make and potentially with huge consequences as I suppose the auditor could be sued for destroying the Company unnecessarily. Catch 22.
Perhaps the answer is as with Sports Direct for the auditors to walk away. Quo vadis Auditor?
Walking away might be as damaging as an unnecessary switch to non-going concern basis. Quo Vadis Auditor indeed.
Another issue is with costs. The usual situation with audit judgements of any kind that have an all-or-nothing character (which most do) is that the level of work necessary to confidently reach the decision increases the closer reality is to the dividing line. In other words, the finer the judgement needed the more the work needed. If your client turns out to be nearer to the line than you thought the difference can be large and of course budgets and fees are set in advance.
I just noticed a good example of what I am talking about. AccountingWEB tells the story of Pizza Express, currently struggling with massive debt. https://www.accountingweb.co.uk/business/finance-strategy/pizza-express-...
It seems PwC signed off the accounts on going concern basis despite it being technically insolvent, because it was still pulling in plenty of cash. (That's what AccountingWEB says anyway - PwC had no comment on the story.)
This is a good example of a business that should have had a higher than usual probability of failure, even if PwC could not conclude that the business would probably fail.
I don't think the issue lies with audit alone. It starts with the trend of loading companies with debt, stripping all value out of them, then letting them crash when, inevitably, there is a slight blip in profits at some point down the line.
Some people make a lot of money, but it is trashing otherwise viable companies and putting people out of work.