Bar to be raised on how boards handle risk

10 Jan 2014

Boards should focus more keenly on their appetite for risk and how they’re managing it, and they should include any risks to liquidity and solvency – according to the proposed Guidance recently issued by the UK’s Financial Reporting Council (FRC) on implementation of the Sharman Report.

Sharman

Boards should focus more keenly on their appetite for risk and how they’re managing it, and they should include any risks to liquidity and solvency – according to the proposed Guidance recently issued by the UK’s Financial Reporting Council (FRC) on implementation of the Sharman Report.

The regulator has decided to integrate this guidance – Draft guidance to directors on risk management and internal control and the going concern basis of accounting - with the implementation of the principles set out in the Sharman Report on going concern. Final guidance will be effective for years beginning on or after 1 October 2014, for companies applying the UK Corporate Governance Code. The FRC is also consulting on specific guidance for banks.

If the proposals are implemented directors will be required to confirm formally that a robust assessment of the principal risks to the company has been carried out and explain how they are being mitigated. This will significantly increase the focus on this area for boards and raise the profile of related disclosures in the annual report. Auditors will also have a duty to report whether they have anything material to add to the directors’ disclosures.

The emphasis on risk and culture - and liquidity and solvency - comes in part as a response to the financial crisis and other recent corporate scandals.

“We welcome the integration of the Sharman going concern principles into a single set of guidance, as well as the emphasis on risk management being embedded at the heart of corporate governance activities” said James Chalmers, UK Head of Assurance at PwC. The consultation emphasises the importance of having appropriate management information and assurance to allow the board to monitor the effectiveness of risk management activity. Mr Chalmers added: “The enhanced narrative risk reporting, including of risks to solvency and liquidity, will enable users to better understand the risks in the context of companies’ business models and help link the front and back halves of the annual report.”