The FRC has blundered into Britain’s boardrooms

...and set out a series of potentially very difficult tests for the directors.

In the aftermath of the banking crisis it was inevitable, and appropriate, that part of the clean up would involve looking at the quality and effectiveness of the auditing and financial reporting of the banks and other associated financial institutions. The fall-out from this process is now starting to hit home with several major reports and consultations reaching a critical stage.

One of these is the investigation carried out by Lord Sharman into the concept of going concern. He was charged by the FRC to investigate whether, in the light of the financial crisis, it was time to reconsider the nature and use of going concern and liquidity risks and any lessons for company directors, investors and auditors and whether they were equally well served by current arrangements.

His inquiry reported back at the end of last year and was broadly welcomed as a sensible piece of work that asked important questions and raised interesting issues for debate. He suggested a number of subtle shifts in the use of going concern, pointing out a need for greater consideration to be given to solvency risk as well as liquidity risk, asking whether more information should be available on the way boards had reached a view on going concern (and especially any assumptions made in the process). But he was equally clear that there was no need to create a special regime for banks and other financial institutions.

In January the FRC revealed how it intended to implement Lord Sharman’s proposals when it released revised guidance on going concern for consultation. The reaction of almost everyone I have spoken to about that guidance has been one of alarm, apart from those who were either shocked or appalled at the prospect. The FRC appears to have adopted the sort of over-implementation more commonly seen when the UK government reacts to a European directive.

Considering the reasoning for his initial investigation, it is alarming to consider that while it’s unlikely much will change in the boardrooms of the UK’s largest financial institutions as a result of the new guidance, the boardrooms of almost every other business are in for something of a shock. Thanks to actions elsewhere in the regulatory universe, banks and financial institutions are already required to pay much closer attention to long-term solvency and liquidity risks and to look further ahead to try and spot and avoid potential future shocks. And for these financial few there is always the backstop of government or central bank support, with bailouts now apparently so normal a part of life that it’s OK for a bank requiring one to be considered a going concern.

Leaving aside the overly optimistic (some might say impetuous) timetable the FRC set for implementation of its guidance, under which the new system is effectively already in play (having kicked in for financial years starting last October, even if they aren’t due to actually report until later this year), there are also doubts being raised about the way the questions for consultation were framed. In January, Scottish Electoral Commissioner John McCormick forced the Scottish National Party to rephrase the wording of the question for the referendum on independence. Apparently voters felt that a question starting “Do you agree…” wasn’t neutral enough. A read of the FRC consultation shows that all but the last of 15 questions is potentially similarly positively loaded.

Doubtless with the best of intentions, the FRC has blundered into Britain’s boardrooms and set out a series of potentially very difficult tests for the directors. Whether directors should be asking themselves these tough questions is one thing, but whether they should be mandated to do so through the corporate governance code (even one built around a comply or explain model) is another. Likewise whether auditors should be thinking again about these issues in greater depth is up for debate, particularly given the wider questions on the future and value of audit. But again whether this is the right time, place or method to introduce such concepts is again questionable.

Above all, these proposals raise a question of who should pay the price for the failures to more accurately predict and deal with the financial crisis. The current FRC guidance seems to suggest that the most effective way to prevent a repeat is to place further complex burdens on those running small and medium-sized businesses and to make it harder than ever for them to access the vital funding and finance from investors. If there is one lesson from the financial crisis and the long, slow and fragile recovery from it is that we should be doing all we can to build confidence across all sectors of the UK economy. The greatest long-term risk to all investors and businesses is not their inherent liquidity or solvency but rather whether there will be a decent and growing market for their goods and services. These proposals will do little to assist that and potentially will be ultimately self-defeating as a result.

The only good news is that however loaded the consultation, the proposed guidance is still just a proposal. There is a public meeting at the FRC next Thursday morning to discuss the pros and cons of the proposals and consultation. Let’s hope that through the force of feedback and constructive discussion we might yet arrive at more sensible implementation of Lord Sharman’s suggestions.

Photograph: Getty Images

Richard Cree is the Editor of Economia.

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Today's immigration figures show why the net migration target should be scrapped

We should measure different types of migration separately and set targets that reflect their true impact.

Today’s net migration figures show, once again, that the government has raised expectations of tackling migration and failed to deliver. This is a recipe for disaster. Today’s numbers run far in excess of 300,000 – three times over what was pledged. These figures don’t yet reflect the fallout from Brexit. But they do show the government needs to change from business as usual.

It has been the current strategy, after all, that led the British public to reject the European Union regardless of the economic risks. And in the process, it is leading the government to do things which err on the side of madness. Like kicking out international students with degrees in IT, engineering or as soon as they finish their degrees. Or doubling the threshold for investor visas, and in the process bringing down the number of people willing to come to Britain to set up business and create jobs by 82 per cent. Moreover, it has hampered the UK’s ability to step up during last year’s refugee crisis - last year Britain received 60 asylum applications per 1,000 people in contrast to Sweden’s 1,667, Germany’s 587 and an EU average of 260.

The EU referendum should mark the end for business as usual. The aim should be to transition to a system whose success is gauged not on the crude basis of whether overall migration comes down, irrespective of the repercussions, but on the basis of whether those who are coming are helping Britain achieve its strategic objectives. So if there is evidence that certain forms of migration are impacting on the wages of the low paid then it is perfectly legitimate for government to put in place controls. Conversely, where flows help build prosperity, then seeing greater numbers should surely be an option.

Approaching immigration policy in this way would go with the grain of public opinion. The evidence clearly tells us that the public holds diverse views on different types of migration. Very few people are concerned about investors coming from abroad to set up companies, create jobs and growth. Few are worried about students paying to study at British universities. On the other hand, low-skilled migration causes concerns of under-cutting among the low paid and pressure on public services in parts of the country that are already struggling.

The first step in a new approach to managing migration has to be to abolish the net migration target. Rather than looking at migration in the aggregate, the aim should be to measure different types of migration separately and set targets that reflect their true impact. In the first instance, this could be as simple as separating low and high skilled migration but in the long term it could involve looking at all different forms of migration. A more ambitious strategy would be to separate the different types of migration - not just those coming to work but also those arriving as refugees, to study or be reunited with their families.

Dividing different flows would not only create space for an immigration policy which was strategic. It would also enable a better national conversation, one which could take full account of the complex trade-offs involved in immigration policy: How do we attract talent to the UK without also letting conditions for British workers suffer? Should the right to a family life override concerns about poor integration? How do we avoiding choking off employers who struggle to recruit nationally? Ultimately, are we prepared to pay those costs?

Immigration is a tough issue for politicians. It involves huge trade-offs. But the net migration target obscures this fact. Separating out different types of immigration allows the government to sell the benefits of welcoming students, the highly skilled and those who wish to invest without having to tell those concerned about low skilled immigration that they are wrong.

Getting rid of the net migration target is politically possible but only if it is done alongside new and better targets for different areas of inward migration – particularly the low-skilled. If it is, then not only does it allow for better targeted policy that will help appease those most vocally against immigration, it also allows for a better national conversation. Now is the time for a new, honest and better approach to how we reduce immigration.

Phoebe Griffith is Associate Director for Migration, Integration and Communities at IPPR