30 January 2013

FT: Banks urged to reveal solvency fears

Struggling banks should not use vague promises of state aid to keep investors in the dark about their fragility, according to new UK guidance aimed at avoiding a repeat of the confusion experienced during the financial crisis.

The Financial Reporting Council said on Wednesday that bank directors and auditors should not rely on generalised words of support from central bankers or the government when deciding whether the institution remained a going concern.

The updated FRC guidance follows controversial secret talks between UK bank auditors and the government at the height of the crisis. Companies must declare in their accounts whether they view themselves as a going concern, meaning they have enough cash and access to funding to survive for at least a year. They must also tell investors if there is a material uncertainty about this status, although such a disclosure would probably be so catastrophic for a bank that regulators would intervene first. Auditors verify the going concern assertion.

The implication that banks could be described as going concerns because of the expectation of sustained state backing was subsequently ridiculed as “Alice in Wonderland” logic during House of Lords hearings.

The FRC’s new guidelines, which remain subject to consultation, draw on the findings of an inquiry headed by Lord Sharman of Redlynch, former chairman of Aviva, the insurer. The regulator is trying to meet the needs of investors for candid information without undermining confidence in the banking system.

Bearing the latter consideration in mind, it said an institution accessing some types of clearly defined central bank support did not need to tell shareholders that there were doubts about its going concern status.

Across all sectors, the new guidelines were likely to have the effect of encouraging more companies to admit to material uncertainties about their going concern status, said Mr Grabowski. They would also increase the information disclosed.

Tony Cates, head of audit at KPMG, said the FRC guidelines might toughen the going concern test too much by forcing companies to consider their viability over a much longer timescale.

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