Auditors requiring enhanced going concern evidence in light of new prudential regime

Assessing and documenting the impact will aid auditors in concluding on appropriateness of the going concern approach and reduce audit close-out delays

Ensure a smooth audit process by preparing early for the new prudential regime.

They say the only constant is change. In the financial services sector, firms combat a seemingly unyielding barrage of regulatory change, and this year is no different with the new prudential regime for investment firms due to be live from 1 January 2022. Auditors have long been required to consider their client’s going concern position before signing off their work each year. Combined with the effects of the pandemic and Brexit, auditors are likely to be looking for more evidence to support the going concern assumption before closing out this year’s audit.

The UK Investment Firm Prudential Regime (IFPR) applies to UK investment firms, including adviser/arrangers, investment managers, brokers and dealers, where the legacy prudential regimes (Exempt-CAD, BIPRU, IFPRU) will be retired and replaced the new MIFIDPRU handbook. The scope of change brought by IFPR is broad; covering capital requirements and resources, liquidity requirements and resources, regulatory reporting, group consolidation, governance, risk, remuneration, Pillar 2 assessments and public disclosure.

Auditors are expected to require evidence from their clients that the impact of IFPR has been considered, with the anticipated impact and any change to their prudential requirements – plus reasonable headroom – factored into forecasts which span 12 months post-signoff.

In keeping with the revisions to ISA (UK) 570 auditors will likely place more emphasis on the going concern position from the planning stage through to completion, so firms should prepare for this to ensure a smooth audit process and avoid undue stress on their compliance, risk and finance functions.

Get a head-start and manage change gradually as the IFPR evolves

The secondary benefits of conducting this impact analysis early should not be underestimated. By preparing now, firms can use the analysis as a base for any future development in the rules, as these are finalised by the FCA. Further, instigating any governance changes and cultural shifts required by the rules, which can take time to embed, will benefit from a head start. The earlier a firm starts to implement its analysis of the new regime, the longer it has to iron out any creases that may be identified along the way and implement into the business-as-usual functions operated by compliance, risk and finance personnel.
Wheelhouse Advisors has been tracking the development of these new rules since 2014, providing the Compliance Officers and other Senior Managers of our investment firm clients with the confidence that:

• the firm’s equity funders are clear on the timelines for staggered prudential capital increases and prepared – well in advance – for the likely quantum of new capital needed to maintain prudential compliance;
• appropriately enhanced prudential governance arrangements are adopted before the new regime is implemented; and
• appropriate steps have been taken to minimise risk of prudential breach and difficulty with the regulator.

Over the past few months, Wheelhouse Advisors has been working with investment firms to address the new regime’s challenges, covering capital requirements and resources, consolidation, governance, reporting, Pillar 2 assessments and public disclosure.

To find out how you could benefit from this experience and insight, please contact us.