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Going concern - Sharman reports

08 November 2011

Going concern and liquidity risks - lessons for companies and auditors

The going concern assessment process must focus on solvency risks as well as liquidity risks, stressed Lord Sharman when his panel published its preliminary report last week.
That includes, he went on, identifying risks to the entity's business model or capital adequacy that could threaten its survival. The company's directors and auditors also has to look at the likely evolution of those risks given its current positon in the economic cycle and the dynamics of its own business cycles. Sharman believes this should include stress tests of liquidity and solvency.
Equally importantly he wants companies to move away from a model where they only highlight going concern risks when there are significant doubts about the entity's survival, to one which integrates the directors' going concern reporting with the directors' discussion of strategy and principal risks.
Sharman wants to end the three category model for auditor reporting on going concern to an explicit statement in the auditor's report that the auditor is satisfied that, having considered the assessment process, they have nothing to add to the disclosures made by directors about the robustbess of the process and its outcome.

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