By Huw Jones
LONDON (Reuters) – Companies must take a longer view in spelling out to shareholders the risks they face from issues such as Brexit and climate change, Britain’s audit watchdog said on Wednesday.
The accounting sector faces a shake-up in Britain after collapses at builder Carillion and retailer BHS raised questions about the quality of auditing by the world’s biggest accounting firms and how effectively they are regulated.
Companies currently set out in annual reports why they think they can remain a “going concern” for the next 12 months, but the Financial Reporting Council (FRC) wants them to take a longer view.
How companies have justified their going concern assessment has become a political issue after the collapse of travel firm Thomas Cook, prompting the FRC to take a harder line.
“The FRC expects companies to think beyond the period covered by their viability statement and identify those key risks that challenge their business models in the medium to longer term and have a particular focus on environmental issues,” the watchdog said in a statement.
It made its comments in a public letter from the FRC’s new chief executive Jon Thompson to the heads of audit committees at companies as they start preparing their 2019/20 annual reports.
The FRC said that in times of uncertainty, whether created by political events, general economic conditions or operational challenges, investors look for greater transparency in corporate reports to inform their decision-making.
“We expect companies to consider carefully the detail provided in those areas of their reports which are exposed to heightened levels of risk; for example, descriptions of how they have approached going concern considerations, the impact of Brexit and all areas of material estimation uncertainty,” it said.
The FRC wants companies to spell out the impact of market transition from the tarnished Libor interest rate benchmark to a new interest rate for financial contracts by the end of 2021.
“This should include early consideration of the need to re-negotiate relevant contracts and agreements,” the FRC said.
The watchdog also published its annual review of company reports, saying it continues to see “basic errors” in how cash flows are reported.
The FRC also has concerns over the level of disclosure around supplier financing arrangements.
(Reporting by Huw Jones; Editing by Giles Elgood)