Definition
The Sharman Inquiry was an investigative setup initiated by the Financial Reporting Council (FRC) in 2011 in response to concerns about the adequacy of financial reporting and auditing practices. The driving factor behind the inquiry was the failure of auditors to forewarn stakeholders about the impending financial troubles of banks and other financial institutions during the financial crisis of 2007-08. The results of the inquiry, led by Lord Sharman, were reported in 2012 and emphasized the need for auditors to evaluate whether an entity’s assumption of a going concern status is sufficient and whether additional disclosures might be necessary to convey the financial health and risks associated with the entity. The recommendations from this report were later incorporated into the Corporate Governance Code.
Examples
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Bank Financial Reporting Post-Crisis: Banks, which had previously received clean auditor reports, showed significant vulnerabilities during the financial crisis. Post-crisis, the Sharman Inquiry led to stronger reporting requirements addressing these concerns.
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Corporate Disclosure Practices: A large manufacturing firm with heavy debts might reassess how it reports liquidity risks. Following the Sharman Inquiry’s recommendations, they may now provide more detailed disclosures in their financial statements around uncertainties and mitigating measures taken.
Frequently Asked Questions (FAQ)
What was the Sharman Inquiry?
The Sharman Inquiry was an investigation initiated by the Financial Reporting Council in 2011 to evaluate how auditors assess and report an entity’s liquidity risk and viability as a going concern.
Why was the Sharman Inquiry established?
It was established due to public dissatisfaction and concern over the way auditors provided clean reports to banks and institutions that later needed financial bailouts during the 2007-08 financial crisis.
What are the key findings of the Sharman Inquiry?
The report suggested that auditors should go beyond simply determining the appropriateness of financial statements grounded in the going-concern concept. Auditors should provide a more comprehensive assessment of an entity’s conditions and potential risks.
Who led the Sharman Inquiry?
The inquiry was led by Lord Sharman, alongside a team of experts.
Which significant code did the Sharman Inquiry recommendations influence?
The recommendations were subsequently integrated into the Corporate Governance Code, enhancing its guidelines and requirements.
What is the going-concern concept?
The going-concern concept is an accounting principle which assumes that a company will continue its operational existence for the foreseeable future.
How has the Corporate Governance Code changed post-Sharman Inquiry?
Post-inquiry, the Corporate Governance Code now includes specific recommendations to ensure more rigorous and transparent assessments of a company’s financial health and risks.
Is liquidity risk the only focus of the Sharman Inquiry?
While liquidity risk was a significant focus, the inquiry also examined other factors that might threaten the viability of entities as going concerns.
Does the Sharman Inquiry apply to all companies?
Primarily, it applies to entities subject to financial audits and similar external evaluations, with implications for broader corporate governance practices.
Related Terms with Definitions
Financial Reporting Council (FRC)
The Financial Reporting Council is a UK regulatory body overseeing financial reporting, auditing, and corporate governance.
Liquidity Risk
Liquidity risk refers to the danger that an entity might not be able to meet its financial obligations as they come due without incurring unacceptable losses.
Going-Concern Concept
The going-concern concept is an accounting principle assuming that a company will continue operating and not liquidate in the foreseeable future.
Corporate Governance Code
The Corporate Governance Code sets out standards of good practice concerning board leadership, remuneration, accountability, and shareholder relations.
Online References
Suggested Books for Further Studies
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“Financial Accounting: An Introduction” by Paul Kimmel, Jerry Weygandt, and Donald Kieso
- Offers an introduction to fundamental financial accounting concepts.
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“Advanced Financial Reporting: A Complete Guide to IFRS” by Seleim, Lavery, and Alberti
- Provides detailed insights into International Financial Reporting Standards.
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“Auditing and Assurance Services” by Alvin A. Arens and Randal J. Elder
- A comprehensive text on auditing principles and practices.
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“Corporate Governance: Principles, Policies, and Practices” by Bob Tricker
- Explores foundational principles and contemporary practices in corporate governance.
Accounting Basics: Sharman Inquiry Fundamentals Quiz
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