Britain’s accounting watchdog has acted to tighten audit standards following a spate of corporate failures in which auditors failed to flag up concerns about the company’s viability.
The Financial Reporting Council (FRC) has issued a revised going concern standard, which means UK auditors will follow “significantly stronger requirements” than those required by current international standards. The watchdog hopes that other countries will follow suit and has already held discussions with regulators in Australia, Canada and Japan.
The revised standard requires:
greater work on the part of the auditor to more robustly challenge management’s assessment of going concern and thoroughly test the adequacy of the supporting evidence.
a new reporting requirement for the auditor of listed and large private companies to provide a clear conclusion on whether management’s assessment is appropriate.
a stand back requirement to consider all of the evidence obtained, when the auditor draws their conclusions on going concern.
Thomas Cook, the world’s oldest travel company, last week became the latest high-profile firm to collapse. The FRC said it was considering whether to investigate the travel firm’s failure and impose punishments if necessary. The FRC’s enforcement division can levy fines and bring prosecutions against auditors for misconduct or breach of the accounting standards.
Stephen Haddrill, the 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.”
Haddrill will leave by the end of October after nine years at the helm of the FRC, which has faced strong criticism following the collapse of Carillion, Patisserie Valerie and other firms. A committee of MPs described the FRC as “chronically passive”, and Sir John Kingman, the chairman of Legal & General, was commissioned by the Treasury to conduct a review of the regulator.
The review recommended that the FRC be replaced with an independent statutory regulator, accountable to parliament, with a new mandate, new leadership and new powers, called the Audit, Reporting and Governance Authority (Arga).
The HMRC chief executive, Sir Jonathan Thompson, will replace Haddrill and also head Arga. GSK’s former chief financial officer, Simon Dingemans, has been appointed as the new chair. Both are due to start in early October. The FRC is recruiting an extra 80 staff this year as it restructures.
