The U.K. Financial Reporting Council tightened a key accounting standard used to assess a company’s health following a string of corporate collapses in Britain.
The U.K. Financial Reporting Council on Monday tightened a key accounting standard used to assess a company’s health following a string of corporate collapses in Britain.
The accounting and audit sector regulator issued a revised version of ISA U.K. 570, the standard that governs the definition of a business as a “going concern” that is likely going to continue operating for at least another year.
Businesses are generally considered going concerns unless management intends to liquidate them or cease operations, or the entity doesn’t have a realistic alternative but to do so.
Under the new standard, auditors will be required to more robustly challenge management’s going concern assessment, test the supporting evidence and evaluate the risk of management bias, the FRC said.
Auditors will have to consider all of the evidence obtained when drawing their conclusions on going concern, even if part of the evidence is contradictory.
Auditors of firms considered public-interest entities, such as credit and insurance companies, and publicly listed and large private companies are required to provide a clear conclusion on whether management’s assessment of going concern is appropriate, the FRC said.
“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,” FRC Chief Executive Stephen Haddrill said.
The standard change, which will be effective for reporting periods starting on or after Dec. 15, sets out tougher requirements for auditors than current international standards, the FRC said.
It comes amid increasing scrutiny from regulators and lawmakers over the country’s accounting and audit sector, in particular the quality of the work provided by the Big Four firms Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP.
“This is in response to findings from our enforcement and audit investigation work, including learning the lessons of BHS,” a spokesman for the FRC said.
BHS Ltd. was a British apparel and furniture retailer that collapsed in the spring of 2016.
Other British companies followed suit, among them construction firm Carillion PLC and coffee chain operator Patisserie Holdings PLC.
Lawmakers and regulators are discussing an overhaul of the rules governing the U.K. accounting and audit sector. The Competition and Markets Authority has suggested an operational split between companies’ audit and nonaudit businesses, while a parliamentary committee called for a structural separation.
The FRC during the year ended March 31 increased the number of investigations against the country’s audit firms, and handed out more and higher fines than in previous years.
As part of the changes in the sector, the FRC will become part of a new regulatory body called the Audit, Reporting and Governance Authority.