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Going Concern: Will Proposed Changes to Audit Requirements Address Concerns Regarding Corporate Failures?

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May 16, 2019
Ben Johnson and Amy McLaughlin
BRG

The Financial Reporting Council (FRC) recently began consulting on a revised International Standard on Auditing (ISA 570), “Going Concern,” specific to the UK. ISAs are the professional standards which set out the auditor’s responsibilities when conducting an audit of financial statements. ISA 570 was last revised in January 2015, and the International Auditing and Assurance Board (IAASB) has no immediate plans to update the international standard. However, the FRC believes it is in the public interest to propose the revisions now, with a view to “driving necessary improvements in audit quality[1]. This follows on the back of recent well-publicised corporate failures.

Previously, the objective of ISA 570 was to obtain sufficient appropriate audit evidence on the appropriateness of management’s use of the going-concern assumption. The revised objectives now include a requirement that the auditor “must” obtain sufficient appropriate audit evidence regarding the existence of any “material uncertainty” relating to the organisation’s ability to continue as a going concern, in addition to concluding on the appropriateness of management’s assessment. The revised standard strengthens the requirements regarding the auditor’s use of professional scepticism and the consideration of the potential for management bias, defined as a “lack of neutrality” by management in the preparation of information. In reaching its conclusion, the auditor will also be required to “stand back” and consider all relevant evidence, whether corroborating or contradictory.

Mike Suffield, the FRC’s Acting Executive Director of Audit and Actuarial Regulation, believes that these changes, whilst significantly increasing the amount of work that auditors will need to undertake, are necessary to ensure investor confidence in the quality of UK audited financial statements[2].

However, this position appears to be premised on the assumption that recent corporate failures in the UK have resulted from, or at least been contributed to by, inadequate audit standards. The revisions to ISA 570 do not address concerns that have also been raised that inherent conflicts in audit firms acting as both auditor of, and advisor to, companies have been a contributing factor in judgments on the appropriateness of the going-concern assumption.

The Competition and Markets Authority (CMA) final report on reforms to the UK audit market stopped short of suggesting a structural breakup of the Big Four’s audit and advisory services but have suggested they be split into separate operating entities to avoid such conflicts of interest[3].

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

 

[1] FRC, Exposure Draft: Proposed International Standard on Auditing (UK) 570 (Revised) Going Concern, Exposure Draft, paragraph 7 (04 March 2019), available at: 7 https://www.frc.org.uk/getattachment/c6a969db-a720-4d69-87fa-1567e970ce24/;.aspx

[2] FRC, “FRC consults on stronger Going Concern standard for auditors” (04 March 2019), available at: https://www.frc.org.uk/news/march-2019/frc-consults-on-stronger-going-concern-standard-fo

[3] Gov.UK, “CMA recommends shake-up of UK audit market,” press release (18 April 2019), available at: https://www.gov.uk/government/news/cma-recommends-shake-up-of-uk-audit-market

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