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

In response to these challenges, the Financial Reporting Council (FRC) has today 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.
• An update for directors of listed companies on reporting on going concern and liquidity risk.

The purpose of the documents is to assist directors by identifying key questions that they may wish to consider when preparing for the year-end and in meeting their responsibilities in relation to annual reports and accounts. These documents do not impose any new requirements on companies or their auditors.

Paul Boyle, 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 of 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 itself 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:

“Today’s 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”.

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
2. All media enquiries should be addressed to Ian Wright, Director of corporate reporting, +44 (0)20 7492 2330 or Jon Hooper, Head of Communications, +44 (0)20 7492 2344 or email at: j.hooper@frc.org.uk.