UK going concern proposal moves away from international audit standard
In response to the criticism the auditing profession has received following major corporate failures, the Financial Reporting Council has issued proposed amendments to ISA 570 Going Concern, which would substantially move the UK away from the international standard, writes Jamie Tomlin.
The UK’s audit standards have broadly stayed very close to their international equivalents, with changes primarily for legal and regulatory matters specific to the UK. The most recent example of a significant diversion was the extended reporting for key audit matters, where the FRC led the world.
How do the proposals seek to strengthen the audit of going concern? By:
- reinforcing scepticism through the fostering of an independent and challenging mind-set;
- improved transparency through enhanced reporting to give greater insight into the audit process;
- enhancing documentation of the auditor’s judgments; and
- reinforcing robust communication between the engagement partner, the audit team and those charged with governance.
The proposals give much greater importance in the objective to the existence of material uncertainties, a theme which flows through the standard as the auditor is directed away from a binary outcome with, possibly, the occasional material uncertainty to a position where we may see more frequent disclosure regarding material uncertainties.
The use of enhanced reporting should benefit both users and auditors, although any change from current practice will require users to relearn how to interpret the disclosure. With, potentially, more instances of disclosures, and perhaps more nuanced disclosures, users may need to recalibrate how they use the information.
The enhanced documentation may work on two levels. The first is simply to improve the standard to give better clarity about what should be documented. The second, and this follows from this first, is that by requiring ‘better’ documentation, this may enhance the judgment process and lead to ‘better’ reporting.
These are only a taster of the proposed changes.
By taking this bold step, the FRC runs the risk of being out of step with the rest of the world, as the IAASB has no current intention to revisit ISA 570. But if the FRC gets this right it could both enhance the UK audit profession and provide better insight for investors.
Jamie Tomlin is chair of the LSCA Technical Committee.
Liked this? Read these: