Accountants will have to determine more thoroughly if a bank can stand on its own two feet for well over a year without taxpayer help under draft changes from Britain's audit regulator.
The Financial Reporting Council (FRC) said auditors such as KPMG, PwC, Deloitte and Ernst & Young would have to examine threats to a company's business model and capital adequacy through the economic cycle for the sector a company is in.
The planned reform stems from anger among U.K. policymakers that auditors gave banks a clean bill of health just before taxpayers had to shore them up in the 2007-09 financial crisis.
Currently auditors only attest to a company as a "going concern" for the following 12 months, but an inquiry by Lord Sharman recommended a longer period and wider criteria.
KPMG said the proposals represented a high hurdle as the duration of an economic cycle was long and may be open to debate. "My concern is that it will be difficult for many companies to meet what appears to be such a tough test," said Tony Cates, KPMG's head of audit.
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The FRC said on Wednesday auditors would also have to be sure a company's solvency and liquidity can be managed for at least a year, disclose any significant risks posed by this, and demonstrate there has been a "robust going-concern assessment".
Currently audits of banks look at solvency and liquidity but in other sectors typically only liquidity is looked at in any depth. There is no requirement at present to show there has been any in-depth examination of going concern issues in an audit.
Going Concern
The reform is part of efforts to end the perception in markets that banks would not be allowed to fail and taxpayers would always ultimately step in to rescue them.
Saying a bank is a going concern based on this assumption won't be acceptable any longer.
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"We make it clear it's not possible or appropriate to rely on banks not being allowed to fail. They would have ensure they have appropriate facilities for as long as they needed," said Marek Grabowski, head of audit policy at the FRC.
The changes would apply to all listed companies who must be audited, not just banks.
The FRC's draft changes have been put out to public consultation until April and follow an inquiry chaired by Lord Sharman who said on Wednesday the reforms will be radical for many companies.
"If implemented effectively, they will support better risk decision taking, ensure that investors, creditors and other stakeholders are well protected and informed about going concern risks," Sharman said in a statement.
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Directors would also be forced to recognize, acknowledge and respond to economic and financial distress sooner rather than later, he added.
The FRC wants to introduce the changes in annual reports for 2013 onwards.