The Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance, has published two documents highlighting the challenges being faced by audit committees and users of actuarial information arising from the difficult economic conditions.
The current economic outlook appears to be less depressed than this time last year. However, significant economic risks remain and will present challenges for many during the 2009/10 reporting season.
Past experience shows that insolvencies have increased after the technical end of recessions as companies run out of working capital. Such conditions mean that the next 12 months are likely to be a particularly difficult for directors, trustees and management and increase the risk that annual reports and accounts misreport facts and circumstances and contain unidentified errors and omissions.
The current year questions for audit committees focus upon the risks that arise as companies change their business models to help manage through the effects of a significant recession. Such changes often involve modifying the terms of trade including arrangements with pension funds. The existence of such changes may call into question whether accounting policies remain appropriate, whether internal control systems capture all of the relevant data in a reliable way and whether assumptions used in models for accounting and actuarial purposes are appropriate in the circumstances.
The current year questions for users of actuarial information are particularly relevant to the governing bodies of insurers and pension schemes, but may also be useful for scheme sponsors, auditors and audit committees. The questions focus on the risks surrounding the business model, how those risks are managed, on understanding the key assumptions and cash flows underlying discounted values and on the quality controls on actuarial work.
Louise Pryor, director, actuarial standards of the FRC, said: “The last year has demonstrated how critical it is to understand risk and uncertainty when making significant and complex financial decisions. Trustees, directors and others who base their decisions on actuarial information need to be sure that they and their actuaries have a shared understanding of the relevant risks.”
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