Sharman panel publishes final report and recommendations
News types: Guidance
Published: 13 June 2012
FRC PN 362
The Sharman Panel of Inquiry, established at the invitation of the Financial Reporting Council to consider Going Concern and Liquidity Risks: Lessons for companies and auditors, publishes its final report (PDF) and recommendations today.
The Panel's key recommendations are that:-
The primary purpose of the going concern assessment and reporting should be to reinforce responsible behaviour in the management of going concern risks; and
The going concern considerations made by directors and reviewed by auditors should cover both solvency and of liquidity and that these should be considered over the cycle, taking an appropriately prudent view of future prospects.
and that the FRC should:
Seek to clarify and harmonise the differing definitions of going concern and related risks in accounting, auditing and governance requirements, working with the international bodies.
Review its Guidance for Directors to ensure that the going concern assessment is integrated with business planning and risk management; focusses as appropriate on both solvency and liquidity risks (including risks to the entity’s business model or capital adequacy) that could threaten the entity’s survival through the cycle; and includes stress tests of liquidity and solvency.
Integrate going concern reporting with its Effective Company Stewardship proposals, to present a fuller picture of the principal risks the entity is taking and facing in pursuit of its business model and strategy rather than only highlighting going concern risks when there are significant doubts about the entity’s survival.
Enhance the role of the auditor by seeking an explicit statement in the auditor’s report about whether the auditor has anything to add to or emphasise in relation to the narrative disclosures made by the directors about the robustness of the process of assessing going concern and its outcome.
The Panel also recommended that the FRC should take a more systematic approach to learning lessons when significant companies fail or suffer significant financial or economic distress but nonetheless survive.
The Panel also looked at whether a special going concern disclosure regime is required for banks and concluded that this should not be necessary. However, the Panel considers it is critical to that conclusion that, in taking forward the recommendation to clarify and harmonise the differing definitions of going concern and related risks, the FRC should clarify that a conclusion that a bank is or would be reliant, in stressed circumstances, on access to liquidity support from central banks that is reasonably assured does not necessarily mean that the bank is not a going concern or that material uncertainty disclosures or an auditor’s emphasis of matter paragraph are required.
Lord Sharman, Chairman of the Panel, said:
"Our final recommendations aim to refocus the going concern process, in light of lessons learnt from the financial crisis, so as to support better risk decision-taking, ensure that investors and other stakeholders are well-protected and informed about those risks and sustain an environment in which directors recognise, acknowledge and respond to economic and financial distress sooner rather than later.”
“The aim of the directors’ assessment and reporting of going concern is not primarily to inform outsiders of distress. Rather, it is to ensure that the company is managed to avoid such distress while still taking well-judged risks. That judgment must rest with the directors and our aim should be to encourage them to discharge their duties in that regard with skill and in good faith.”
“In reaching our recommendations, and in keeping with the responses we have received, our primary purpose has therefore been to reinforce responsible behaviour in the management of going concern risks for companies.”
“Our report addresses in some detail the special considerations for going concern reporting that flow from the unique business model of banks. A key question which we raised in our preliminary report was whether the public interest objective of financial stability should ever override the public interest objective of transparency in capital markets. We have set out in our report our vision of how these may be reconciled.
“The success of this vision depends critically on: there being adequate central bank liquidity support to address systemic crises; close dialogue between directors, auditors, supervisors and the Bank of England; directors and auditors each being able to reach their own conclusions about the bank’s ability to withstand anticipated stresses, including whether access to central bank liquidity support would be available where necessary; and acceptance that, where such support is expected to be available and relied upon, market transparency does not demand disclosure of that fact to the markets."
Stephen Haddrill, Chief Executive of the Financial Reporting Council, said:
“The FRC welcomes the Panel’s report and thanks Lord Sharman and his fellow Panel members for their insights and recommendations. We will now embark on a careful consideration of the most effective way to take these forward so as to improve the quality of corporate reporting and dialogue between investors and company boards and to reinforce the effective management of going concern risks for companies. The FRC reform has been designed partly to enable us to respond positively to the Panel’s recommendation that we take a more systematic approach to learning lessons when significant companies fail."
"The final report has made significant ground in exploring the implications of the Panel’s preliminary recommendations and how these may be taken forward. In doing so, it provides much further analysis of the issues identified and this should assist the FRC in developing these recommendations in the UK and in promoting them on the international stage.”
“We will explore the matters relating to banks with the Government, the Bank of England and other stakeholders.”
Notes to editors
The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.
Further information about members of the Panel of Inquiry:
Lord (Colin) Sharman is Chairman of Aviva plc. He has also been a Non-executive Director of a number of other listed companies, including most recently BG Group plc and Reed Elsevier plc. He joined the KPMG partnership in 1966, and held a number of senior UK and international positions, including Chairman of KPMG Management Consulting world-wide from 1991 to 1994, UK senior partner from 1994 and Chairman of KPMG International from 1997. He retired as international chairman and from the KPMG partnership in 1999. In October 1999 he was sworn into the House of Lords. He was the Liberal Democrat Spokesperson for Trade and Industry/Business, Enterprise and Regulatory Reform from 2001 to 2010. In February 2002, he completed a study of Central Government Audit and Accountability commissioned by the chief secretary to The Treasury.
David Pitt-Watson is the Chair of Hermes Focus Funds, and former CEO of all Hermes Shareholder Stewardship activities. These are the largest shareholder stewardship programme of any fund manager in the world. He has been involved for many years in the global debate about corporate governance, both as a writer and an advisor. He is currently a director of the International Corporate Governance Network. He is a Fellow of the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) and leads the RSA’s Tomorrow’s Investor project. He is a trustee and Treasurer-designate of Oxfam UK.
Roger Marshall is a Director of the FRC and Chairman of the FRC’s Accounting Standards Board. He spent much of his career in PricewaterhouseCoopers, where he was an audit partner in London and Zurich and led the audits of a number of FTSE and other large multinational audits. Roger chaired PwC’s Global Audit Policy Board in 2003-2007 and its global Corporate Reporting Task Force in 2008-2009. He left PwC in 2009 and now serves on several Boards and committees including Old Mutual plc where he is Chair of the Audit Committee.
The FRC’s report, ‘Effective Company Stewardship: Enhancing Corporate Reporting and Audit’ and related feedback statements can be found here.