LONDON, Nov 6 (Reuters) - Britain’s listed companies may have to publish details of risks that could put them out of business and auditors will have to verify all the risks have been properly disclosed, in reforms proposed by the accounting watchdog.
The Financial Reporting Council (FRC) wants a cultural change to end box-ticking exercises of the past. Its proposed reforms follow the 2007-09 financial crisis which saw banks being rescued by taxpayers despite accountants giving them a clean bill of health just months before.
The FRC, which polices company reporting and accountants, proposed on Wednesday that listed companies publish in their financial reports specific risks to their solvency and liquidity.
Companies currently only state they are a “going concern”, meaning they can pay their bills for the next 12 months, without going into too much detail. Following a consultation period, the final changes are due to take effect for Sept. 2015 financial year end statements.
“What we are trying to do is give rise to a step change in some companies in terms of the robustness and depth of the assessment they make about solvency and liquidity risk,” said Melanie McLaren, FRC executive director for codes and standards.
“We also want to make sure the companies take auditors alongside in that step change,” McLaren said.
Many companies already examine risks in depth but don’t publish those risks in detail, she added.
The auditors will continue to assess if a company is a “going concern” but in future would have to disclose if they feel any risks to solvency and liquidity have not been fully described or robustly addressed by the company.
“The subtext is a big cultural challenge to auditors because the risk management world has been dominated by box tickers,” said Douglas Anderson, a partner at consultancy Hymans Robertson.
“It almost requires the brains of the auditors to be rewired to think about the stuff not written about. It requires you to look ahead while a lot of internal controls are backward looking,” Anderson said.
Investors are likely to welcome the proposal which encourages boards to explain how any significant weaknesses in risk management and internal control are being addressed, said Hywel Ball, UK head of assurance at EY.
“But only time will tell whether this proposal, if implemented, results in lengthy or boilerplate disclosures.”
The FRC is likely to put forward guidance on what investors think is pertinent in terms of risks in a bid to crack down on vague disclosures, McLaren said.
The change will mean more companies outside financial services hiring chief risk officers, and pressure on company audit committees to think more strategically, Anderson said.