"Risk comes from not knowing what you're doing."
In their consultation document of April 2014 on Risk Management,
Internal Control and the Going Concern Basis of Accounts, the
Financial Reporting Council (FRC) in the United Kingdom took the
advice of the Sage of Omaha to heart.
WHO IS AFFECTED?
As part of its review of its guidance for directors (Turnbull
Guidance) on internal controls for all listed companies, the FRC
issued draft guidance, the purpose of which is to "make a
clearer link between the assessment of business viability risks and
the broader risk assessment that should form part of a
company's normal risk management and reporting processes."
Specifically the guidance requires a link between the going concern
certification in accounts and the completion of risk assessment
The guidance itself states "an understanding of the risks
facing the company is essential for the development and delivery of
its strategic objectives, its ability to seize the opportunities,
and to ensure its longer term survival. It is one of the most
important issues with which boards must concern themselves."
As a result, the guidance specifies that risk management should be
incorporated within the company's normal management and
governance processes and should not be treated as a separate
The board is charged with making a "robust" assessment
of the principal risks to the company's business model and
ability to deliver its strategy. Both this assessment and the
ongoing monitoring and mitigation of risks must be disclosed in the
Strategic Report as part of the company's Annual Report and
linked to relevant disclosures it makes in the financial statement
in relation to its going concern status.
"The directive should state whether, taking account of the
company's current position and principal risks, they have a
reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they fall due, drawing
attention to any qualifications or assumptions as
In practical terms this means that starting in October 2014, in
any listed corporate failure or investigation in the United Kingdom
by the Serious Fraud Office, the police, the central government, or
any other regulator, the authorities or insolvency practitioners,
with the benefit of 20/20 hindsight, will carefully examine what
steps the board took to comply with FRC requirements. In particular
there will be a focus on what the board and individual directors
knew or should have known at the point when the relevant risk
emerged. The linkage of risk assessment, corporate governance
requirements, and going concern certification could lead to
wrongful trading-type arguments in the context of overall risk
assessment. Under insolvency laws, directors can become personally
liable for insolvent company liabilities if they know or should
have known that a company was unlikely to avoid insolvency but
continue to permit the company to trade. The prospect of similar
arguments being used in the context of civil or criminal
proceedings relating to risk assessment procedures and what
directors did or should have known seems to have become more likely
with the new FRC requirements. Importantly, all of this also
relates to international companies that are listed in London.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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