By Huw Jones
LONDON (Reuters) – Accountants will be required to make deeper checks into whether a company is able stay in business under a proposal by Britain’s audit watchdog following the collapses of Carillion and BHS.
The Financial Reporting Council (FRC) proposed revising its current rules on Monday so that auditors more robustly challenge a company’s own assessment of being a “going concern”.
“The collapse of large companies such as HBOS, BHS, and Carillion has brought into question why such companies had clean auditor’s opinions, which included no warnings that the companies were at risk of collapse,” the FRC said.
Auditors would have to complete a “stand back requirement” to consider all of the evidence obtained from a client’s management, whether corroborative or contradictory, when they draw conclusions on going concern.
“Recent corporate failures and the FRC’s own enforcement work has shown the existing Going Concern Standard needs to be strengthened,” said Mike Suffield, the FRC’s acting executive director of audit.
“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 scandals at Carillion and BHS angered lawmakers and shone a harsh light on the audit sector.
The government is deciding how to implement recommendations from the Competition and Markets Authority to improve quality in audit. An independent review wants to scrap the FRC and install a new, more powerful regulator.
The FRC said the revisions proposed to the going concern standard would mean significantly stronger requirements on UK auditors than those required by international standards.
An auditor would have to publicly say whether they agreed with a company management’s assessment that it could stay in business for the foreseeable future, usually taken to mean a year from the reporting date, and to set out the work done to reach this conclusion.
The FRC has put out its proposed revisions to public consultation until June. It estimated it would cost over 16 million pounds a year to cover the extra hours needed to apply the new rules, paid for by the auditors and their clients.
(Reporting by Huw Jones; Editing by Alexander Smith)