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Fresh advice for directors in credit crunch

31 Dec 08

The regulator is offering company chiefs and audit committees guidance for troubled times

The Financial Reporting Council (FRC) has published fresh guidance for company directors and audit committees on the challenges of the credit crunch.

The FRC says that it recognises that the global liquidity squeeze and its impact on the wider economy increase the challenges for directors in preparing corporate reports. This means that directors and audit committees may need to spend more time planning year-end activities, reviewing key assumptions and models used in financial reporting, and reviewing the significant accounting and disclosure judgements.

In response to these challenges, the FRC has published:

• An analysis of some of the challenges for audit committees arising from current economic conditions and some suggested questions that audit committees may need to address; and

• An update for directors of listed companies on reporting on going concern and liquidity risk.

The documents are intended to assist directors by suggesting key questions to consider when preparing for the year-end and in meeting their responsibilities in relation to annual reports and accounts. They do not impose any new requirements on companies or their auditors.

Paul Boyle, the FRC chief executive, said: “There is a variety of standards and guidance which companies need to take into account in preparing their annual reports and we hope that directors will find our material useful in highlighting some of the key issues. We recognise that going concern assessments may be particularly sensitive this year and will require thorough preparation and balanced judgements.”

The FRC update on going concern brings together the key accounting requirements and the disclosures relevant to going concern and liquidity risk and sets out the main points of interaction between the judgements made by directors and auditors. The update highlights the challenges for all of the parties involved:

• Directors will need to ensure that they prepare thoroughly for their assessment of going concern and make appropriate disclosures;

• Auditors will need to ensure that they fully consider going concern assessments and only refer to going concern in their audit reports when appropriate; and

• Investors and lenders will need to be prepared to read all the relevant information in annual reports and accounts before making decisions.

The update also notes that the absence of confirmations of bank facilities does not of necessarily cast significant doubt on a company’s ability to continue as a going concern nor necessarily require auditors to refer to going concern in their reports.

The FRC has also published the results of a study of companies’ disclosures on going concern and liquidity risk, with conclusions and recommendations for improvements.

Ian Wright, FRC director of corporate reporting said: “This initiative is the latest in a series of actions taken by the FRC and its operating bodies during 2007 and 2008 to help mitigate the increased risk of errors and omissions in annual reports which have the potential to adversely affect confidence in corporate reporting. We will continue to monitor developing issues and will be seeking to help the market whenever possible.”

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