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.

Photo: Getty
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Why the past 12 months have been the worst of my lifetime

We desperately need a return to calm and moderation.

Twitter is a weird phenomenon: a deeply selective, wholly unreliable Survation or YouGov in your pocket, with an even bigger margin for error. I’ve been tweeting for a year now, but I’m still useless at guessing what is likely to attract attention; so I was taken completely by surprise at the end of last week when a comment I jotted down received thousands of Likes and retweets. “It’s a year since Jo Cox was murdered,” I wrote: “the worst year for Britain in my lifetime. We badly need a return to Jo’s concept of moderation now.”

Fairly anodyne, you would have thought, but it seems to have touched a nerve. Clearly many other people feel that the past year, with its violence and disasters and wholesale political instability, has been a bad one. For days afterwards, my phone kept buzzing as more people retweeted it. There were, as always, a few contrarians who objected that other years since 1944 must have been worse; some said “much worse”. But that isn’t really true.

After D-Day, we knew the war was going to be won. Despite the bombs, the country was proud of itself and pulling together, and the likes of my father were hoping for a better world as soon as it was finished. The year of the Suez crisis, 1956, was pretty bad, but Anthony Eden was gone directly, and Harold Macmillan’s phoney self-confidence convinced people that things would be all right – and anyway the economy was growing impressively.

The period of the Heath government had awful moments: 1972, the year of Bloody Sunday and IRA attacks, was especially bad. Yet there was nothing like the appalling Grenfell Tower fire to divide the nation. And 1974 was humiliating for the government, but our membership of the European Economic Community offered a certain stability. We had a different, more forelock-tugging relationship with our political leaders then. The news bulletins used to talk reverently of “the prime minister, Mr Wilson”; now they just say “Theresa May”.

Today we have a prime minister who is held to have been mortally wounded by a series of personal failures and miscalculations; a governing party that has been self-harming for years over the question of ­Europe; an opposition that, until just recently, was regarded as hopelessly incompetent and naive; an economy that could be damaged by an ill-judged Brexit agreement; and a new vulnerability to terrorism, in which one atrocity quickly overlays the memory of the last.

There’s a newly hysterical tone in British society, which had always seemed so reassuringly reliable and sensible. The crowd that stormed Kensington Town Hall as though it were the Bastille or the Winter Palace mistook a man in a suit for a Tory councillor and beat him up. It transpired that he was an outside contractor who had spent much of the week helping the Grenfell Tower victims.

Above all, what was until recently the world’s fifth-largest economy has suddenly found itself on the edge of a trapdoor in the dark. “Back to the Thirties”, some people are saying. “Venezuela”, say others. Even Brexiteers who feel liberated and excited at the prospect of getting out of the EU can’t know if it’s going to work. Friends of mine who voted Leave because they were fed up with David Cameron or thought things needed a shake-up now show a degree of buyer’s remorse. Perhaps, like Boris Johnson in the BBC2 drama Theresa vs Boris, they thought the country was so stable that nothing bad would actually happen.

We’ve entered a period of sudden, neurotic mood swings. The opinion polls, unable to cope, tell us at one moment that Jeremy Corbyn is regarded as dangerous and useless, and at the next that a growing number of people see him as the national saviour. The Prime Minister’s “safe pair of hands” are now deemed too shaky to carry the country’s china. Ukip polled over 10 per cent in 450 seats in 2015, and in only two seats in 2017.

If any further evidence of neuroticism is needed, there is the longing that people have to be enfolded in the arms of a comforting authority figure. For some, it was the Queen, calming everyone down with a message of unity, or Prince William, hugging a grieving woman after the Grenfell Tower fire. For others, it was Corbyn doing the right human things while Theresa May walked past the tower ruins awkwardly, not knowing what to say.

It feels like being back in 1997, with the huge crowds in the Mall or outside Kensington Palace demanding to be comforted after the death of Diana. Then, the Queen was blamed for not being the mother figure we seemed, disturbingly, to want. Tony Blair had the right words at that time, and no doubt he would have had the right words after Grenfell Tower. But is it merely words and gestures we need?

It’s a bad sign when countries feel that they need an individual to sort them out. It’s because of its system, based on openness, inclusiveness and the rule of law, that Britain has grown strong and wealthy. Jo Cox said in her maiden speech in June 2015: “While we celebrate our diversity, what surprises me time and time again as I travel around the constituency is that we are far more united and have far more in common than that which divides us.”

She was murdered by a fanatic who screamed, “This is for Britain! Britain will always come first!” The year that those words ushered in has indeed been the worst in my lifetime. The government slogan “Keep calm and carry on” was invented in 1939, when all-out German bombing seemed imminent. It is easy to lampoon but when it was rediscovered a few years ago it became popular, because it spoke directly to our national consciousness. We’ve never had more need of calmness than now.

John Simpson is World Affairs Editor of BBC News, having worked for the corporation since the beginning of his career in 1970. He has reported from more than 120 countries, including 30 war zones, and interviewed many world leaders.

This article first appeared in the 22 June 2017 issue of the New Statesman, The zombie PM

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