The Financial Reporting Council has published a paper on the challenges that audit committees are likely to face during the 2009/10 reporting season arising from the difficult economic conditions.
The FRC recognises that the current economic outlook is improving but is concerned by the fact that, in the past, insolvencies have increased after recessions have ended as companies run out of working capital. The paper poses questions which seek to identify issues relevant to the work of audit committees but it does not establish any new requirements. The questions focus on:
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reconsidering accounting policies and the effectiveness of the system of internal control where a company has changed its business model to improve cash flow or manage competitive pressures;
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the need to consider a wider-than-normal range of reasonably possible outcomes for cash flow projections and valuations;
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the need for greater attention to key assumptions and processes that lead to cash flow forecasts given the heightened liquidity risk; and
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an increased risk of error or omission or manipulation of the annual financial information given the increased economic pressures.
The paper is available here.
