Marek Grabowski Director of Audit Policy Financial Reporting Council 5Th Floor, Aldwych House 71 – 91 Aldwych London WC2B 4HN

Marek Grabowski Director of Audit Policy Financial Reporting Council 5th Floor, Aldwych House 71 – 91 Aldwych London WC2B 4HN 1 May 2013 By email: [email protected] Dear Marek Implementing the Recommendations of the Sharman Panel: Revised Guidance on Going Concern and revised International Standards on Auditing (UK & Ireland) (‘the draft guidance’) Introductory remarks Chartered Accountants Ireland (‘the Institute’) is pleased to respond to the above consultation. In framing our response, both in terms of general comments and in answering the specific questions in the Consultation, we have had regard to the particular circumstance of Chartered Accountants Ireland which has significant membership both in the United Kingdom and in Ireland. We are also grateful to staff of the Financial Reporting Council (‘FRC’) who took the time to visit Dublin recently to meet with various Irish stakeholders to discuss both these proposals and other FRC proposals for amending ISA 700 (UK & Ireland) ‘The Auditor’s Report on Financial Statements’. This meeting has been helpful to us in finalising our comments, as has the public meeting held by the FRC in London on 25th April. The Institute has previously expressed its support for a key aim of the Sharman Inquiry, namely to address questions that have been previously raised about the ‘quality of information provided on companies financial health and their ability to withstand economic and financial stresses in the short, medium, and longer term’. In our comments on the original Sharman Inquiry ‘call for evidence’ the Institute expressed the view that enhanced disclosures of an entity’s financial risks would be of benefit to stakeholders in assessing the sustainability of an entity. Such disclosures might include comprehensive information in relation to projected liquidity ‘headroom’ and sensitivity analyses demonstrating an entity’s ability to withstand adverse developments. We also commented on further enhancements to the role of audit committees and/or risk committees in overseeing the provision of such information. While the Institute also supports further enhancements and development of the role of the auditor in ‘going concern’, such measures need to take place as part of global reforms and include appropriate ‘safe harbour’ provisions – likely only to be provided via legislation, such as that which already affords protection to directors of UK companies when reporting in accordance with company law. We continue to support this overarching objective. General remarks Our responses to the questions asked in the Consultation are set out in the Appendix to this letter. However, we do have a number of general and overarching issues we would like to raise and which also provide some context for our answers to specific questions. These relate to; Different uses of the term ‘going concern; The introduction of new terminology; Application date; Clarification of the responsibilities of the statutory auditor; Accessibility of the Guidance to SMEs; International considerations; and Application of the Guidance in Ireland (including the Supplement for Banks). Different uses of the term ‘going concern’ The ‘going concern basis’ for the preparation of financial statements is a long established concept in financial reporting, referenced in extant UK/Irish GAAP, FRS 100-FRS 102, and in IFRS. While this concept and its use is familiar to those with a close association with financial reporting and statutory audit, the financial crisis has demonstrated that generally there continues to be misunderstanding and confusion around the application of the going concern concept to financial statement preparation and the role of statutory auditor in addressing going concern issues. The revised guidance proposes two different uses of this term and for different purposes (financial reporting and stewardship) along with two sets of disclosure requirements that relate to these. As drafted, we do not support the approach of a single term applying to two separate purposes. We believe this will result in further confusion among users and other stakeholders. Instead, we would encourage the FRC to consider ‘decoupling’ the narrative reporting relating to liquidity, solvency, sustainability risks etc. from ‘basis of preparation’. We suggest, therefore, that the disclosures now envisaged that relate to ‘stewardship’ be referred to by a different descriptor than ‘going concern’. While we acknowledge that this may necessitate amending or clarifying the Listing Rules UKLA, not to do so will, we believe, result in further confusion and misunderstanding and lead to a further widening of the expectation gap. Introduction of new terminology The revised guidance contains a number of terms which, in the context of their assessment of going concern, directors may find difficult to apply and indeed, may be applied inconsistently from one entity to another. Specifying that a ‘high level of confidence’ is needed before an entity can be regarded as a going concern implies a degree of certainty that is, at least, challenging in current economic conditions. When this is then applied to the ‘foreseeable future’, now with potentially longer term and qualitative aspects, entities, as well as their directors and auditors may well need additional time (which may include the need to take advice) compared to the current effective date to appreciate fully the implications of the revised guidance. Irrespective of the application of this threshold to listed companies, SME’s in particular, face a greater vulnerability to general factors such as the continuing availability of bank finance or the viability of their customer base that may make this threshold unachievable in a meaningful way. Application Date The Institute is not supportive of retrospective application of the revised guidance. Quite apart from a departure from normal practice, the revisions to the Guidance are sufficiently significant from the 2009 Guidance it is replacing that entities and their directors included within its scope will require appropriate time to consider its implications. Clarification of the responsibilities of the statutory auditor We welcome comments made by FRC staff during the above mentioned meeting in Dublin recently that the responsibility of auditors in communicating to audit committees views on the ‘robustness’ of going concern assessments is derivative from the work currently undertaken for the purposes of issuing their audit opinion on financial statements. There is no intention that the scope of audit work will change. The current wording of proposed amendments to ISA 260 (UK & Ireland) could be misinterpreted in this regard. We would therefore like to see some clarificatory wording inserted to ISA 260 to reflect this intention. However, it should be recognised that the work effort involved, if the proposed guidance is implemented, could be significant even if the audit scope remains unchanged. International Considerations We note that both the Sharman Recommendations and the Consultation Paper itself make reference to international developments. In particular, we note Sharman Recommendations 2(a) and 2(c) which may ultimately impact on the interpretation of ‘going concern’ and the significance of ‘material uncertainties’. We also note the reference to the IFRS Interpretations Committee considering possible changes to IAS 1. The FRC is also familiar with ongoing discussions at European Union level particularly with regard to the auditor’s role in respect of ‘going concern’. In view of the above ongoing considerations we have reservations about immediate application of the revised guidance and amendments to auditing standards and the cost and inconvenience these may cause when potentially further amendments may be needed in the near future to accommodate further change internationally. We have noted also comments by the representative of the Investment Management Association at the meeting of 25th April on the potential for misconception and misunderstanding by international investors when considering annual reports of companies who have applied the revised Guidance in its current form. We have some sympathy with the argument that UK/Irish entities applying the revised Guidance could appear less attractive to such investors when making asset allocation decisions. Application of Guidance to SMEs As drafted, the revised guidance is confusing in terms of its application to small and medium sized entities and also to private companies who are not subject to the UK Corporate Governance Code (’the Code’) (nor choose voluntarily to comply with its provisions). While clearly there is overlap, confusion arises by conflating reporting requirements of the Code with those of company law. There is little attempt to distinguish between requirements common to all companies and those additional reporting requirements applicable to those within the scope of the Code. Some revision to Section 4 of the revised Guidance on reporting would be helpful which would distinguish between the broader based ‘business review’ required by company law (which does not specify an overt statement as to whether the company is a going concern), and the more specific requirements of the Code. We note that at the FRC meeting on the 25th April, there was some acknowledgement of the SME issue and an apparent willingness on the part of the FRC staff in attendance to reconsider this matter. We would encourage the FRC’s efforts in this regard. Application of Guidance in Ireland The FRC may

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