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ACCA comment on the FRC consultation on risk management

  • ACCA (UK Association of Chartered Certified Accountants) (lt green) Image

30 Jan 2014

The Association of Chartered Certified Accountants (ACCA) has published their response to the Financial Reporting Council’s (FRC’s) consultation ‘Risk management, internal control and the going concern basis of accounting’. Whilst commenting that “the new draft guidance much better reflects the intent of the Sharman Panel” and “that the joined-up approach in the guidance, which attempts to link risk management and internal control with risk reporting and assessment of going concern, is very helpful”, the ACCA has expressed some “serious concerns” with the “prioritised risk listing approach” to risk identification and management proposed by the FRC.

The FRC draft guidance, published in November 2013, seeks to integrate the FRC current guidance on going concern and risk management and internal control (often referred to as the “Turnbull Guidance”) and also makes some consequential revisions to the UK Corporate Governance Code and auditing standards.  The FRC has taken this approach “to encourage boards, as part of the same on-going process, to consider risk identification and management, including the assessment of solvency and liquidity risks, and to determine whether the company is able to adopt the going concern basis of accounting”.  

The FRC draft guidance also seeks to support the principles underlying the recommendations advocated by Lord Sharman in his report “Going Concern and Liquidity Risks: Lessons For Companies and Auditors” (link to FRC website).  

The main concern of the ACCA is that they feel the draft guidance will “steer” directors to a certain approach to risk management and that using the approach directors may feel that they have identified a complete list of risks which are the only ones they feel they should be managing.  They highlight that “the main danger, or risk, is that the guidance could foster a misplaced complacency about risk and the resilience of the risk model”.  They comment: 

the draft guidance implies that there is one way to do risk management by assessing the principal risks to the company’s business model and ability to deliver its strategy.  While this may be an important component of managing risk for most companies it should not be the only one.  This approach tends to assume that all significant risks can be foreseen and accurately assessed 

Company resilience, not risk assessment, should be the principal aim for boards when considering risk 

The ACCA would like further guidance as to how companies and their boards can be resilient to risks that have not been identified and provide some suggested steps to ensure this in their comment letter such as scenario planning and analysis.  

In relation to the section on guidance to identify material uncertainties to the going concern basis of accounting, the ACCA comment that they “broadly agree” with the proposals but would like the FRC to be clearer on the purpose of the exercise. 

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