The Financial Services Authority (FSA) published its Financial Risk Outlook (FRO) outlining the main risks facing firms, consumers and the regulatory system in the economic downturn, in particular the challenges created by banking sector and real economy deleveraging.
This year's FRO is divided into three sections:
- Financial and economic crisis sets out an integrated view of the macroeconomic, financial and regulatory developments which lie behind the crisis. It outlines issues relating to the regulation of banks and bank-like institutions which will be covered by the Turner Review and an FSA discussion paper due to be published in March;
- Economic outlook describes a central economic scenario drawn from various forecasts focusing in particular on how deleveraging is likely to affect firms, markets, consumers and the FSA. Three alternative scenarios explore the ways in which the economy and financial sector could plausibly evolve over the medium and long term to highlight the substantial uncertainties that face both firms and consumers;
- Outlook for financial sectors and consumers identifies the risks and implications of the financial and economic environment for firms, market participants and consumers.
More specifically, pages 75 and 76 of the report discuss the outlook for the accounting and auditing profession.The report states that 'As economic conditions deteriorate, balanced judgements will need to be made by preparers and auditors over whether firms will continue to be going concerns. Separately, there is a risk that confidence in the role of audit could be impaired should one of the 'Big Four' audit firms collapse.'
The report has the following key messages for firms:
- To enhance market confidence, it is important that firms provide sufficient disclosures about the key judgements and uncertainties concerning valuations and any reclassifications in the accounts.
- Firms need to provide adequate disclosure of how they manage liquidity risk and should take additional care to identify any material uncertainties regarding their business' ability to continue as a going concern.