LONDON (Reuters) - The Financial Reporting Council (FRC) has backed down from requiring auditors to make long-term predictions about whether companies will stay in business, after the industry complained the move was impractical.
The FRC alarmed accountants in January with plans to force them to say whether they were confident a company had enough resources to keep going for the foreseeable future.
That would be a major extension from the existing requirement to sign off in annual reports that a company has the ability to remain as a “going concern” for the next 12 months.
The proposal was based on the so-called Sharman report that identified accounting lessons from the financial crisis when auditors gave banks a clean bill of health just before taxpayers had to shore them up.
The FRC said on Thursday it would issue fresh consultation papers in the autumn that would sketch out a lighter regime for small companies and revisit definitions and scope generally.
“We have listened to all the views expressed on the details of our proposals and are now able to prepare more appropriate proposals for all businesses, large and small,” said FRC executive director for codes and standards Melanie McLaren.
Accounting experts welcomed the shift in stance.
“It’s really good news,” said Andrew Gambier, manager of technical strategy at the ICAEW, an accounting body in London.
“It does look like this ‘foreseeable future’ and ‘high level of confidence’ is going to be revisited,” he added.
Gambier said short-term risks around liquidity had been mixed up with long-term issues such as the viability of the company’s business model.
Hywel Ball, UK head of assurance at Ernst & Young, one of the world’s top four accounting firms, welcomed the FRC’s rethink, saying if it had gone ahead, it would have made it difficult for investors to compare UK companies with their international peers.
The FRC said it would make a clearer distinction between the “going concern” issue and broader matters highlighted by Sharman to assess a company’s viability.
Changes to Britain’s corporate governance code may be needed, which would take effect in October 2014.
Editing by Mark Potter