FRC calls for better risk management

The Financial Reporting Council (FRC) is calling on auditors to work on their risk management techniques and has called for a cultural change that ensure the box-ticking exercises of the past are left behind.

It has published for consultation changes to the UK Corporate Governance Code, looking at how ostensibly healthy firms failed in the financial crisis despite having been audited prior to their collapse.

Melanie McClaren, executive director for codes and standards, said: "Understanding the principal risks facing the company is essential for the development of strategic objectives, and the ability to seize new opportunities."

She added that this kind of knowledge is also important for investors, who need to understand the plans and procedures of a business before putting cash into it.

Risks to solvency and liquidity are some of the biggest issues the FRC hopes to address, calling for robust assessment and strong communications channels between auditors and investors.

Companies currently only state they are a "going concern", meaning they can pay their bills for the next 12 months, without offering additional details about the state of their finances.

The FRC's changes are to take effect for the financial statements released at the end of September 2015, leaving auditors with plenty of time to change their approach.

Douglas Anderson, a partner at consultancy Hymans Robertson, told Reuters these changes will represent a major cultural change for an industry which in the past may have been too lax in its dealing with the corporate world.

"It almost requires the brains of the auditors to be rewired to think about the stuff not written about. It requires you to look ahead while a lot of internal controls are backward looking," he explained.

The audit industry has been placed under major scrutiny in recent years, especially following the events of 2008. According to the FRC, the onus is on auditors to restore trust in the sector by rejigging their procedures.

It is likely the body will offer guidance on the most pertinent issues in order to avoid vague disclosures.