Confidence Starts with Good Governance
July 20, 2020
COVID-19 is creating radically new conditions in which organizations must think, plan, and operate. Such challenges can shake the foundation upon which relevant, reliable and high-quality information—relied on by markets and economies to function – is based. During times of crisis, the importance of good governance becomes crystal clear in maintaining the quality and integrity of decisions made, information reported, and messages communicated to stakeholders.
As organizations evolve to adapt to the “new normal,” so too must the structures and processes of governance that sustain them. For those charged with governance (TWCG) – including an organization’s senior management, board of directors, audit committee members, and others – this means taking actions to protect the business, its employees, and all stakeholders affected by its actions.
Good governance is based on good information - and high-quality information is the foundation of confidence and accountability in good times and bad.
After all, maintaining trust and confidence during a crisis is the fastest path to recovery after a crisis. In order to support high-quality financial reporting during crisis, TCWG may consider the following actions.
Boards and management teams can take steps to evolve culture and thinking within the company to reflects new realities. This means that:
- Integrated thinking, which focuses on understanding drivers of organizational value, resiliency of the business model, clear assessments of risks and opportunities, and strong alignment of KPIs and incentives, is adopted.
- Internal controls are adapted or enhanced to reflect new operating conditions.
- “Tone at the top” makes clear there is zero tolerance for inappropriate activities and encourages employees to speak up if they see mistakes or wrongdoing.
- There is a heightened state of alertness to help detect fraud or manipulation of accounting information.
- Collaboration with external auditors results in appropriately updated risk assessments, enhanced engagement with finance functions and internal audit, and sufficient appropriate audit evidence.
Audit Committees must be vigilant, agile, independent, disciplined, and engaged. To optimize their crucial role in governance, oversight, and long-term value creation during times of crisis, audit committees must:
- Stay informed by maintaining a timely and clear understanding of how the continuously-evolving operating environment may impact organizational objectives, risks, and performance.
- Communicate and collaborate by adopting a multi-disciplinary approach to oversight of internal audit, external audit, and reporting.
- Leverage available expertise by seeking qualified and reliable assurance and advice on management evaluations of, and responses to, the organization’s continuously evolving risks and risk profile.
- Promote continuous improvement by encouraging innovation and change to address vulnerabilities and to build resilience.
- Think holistically by adopting a broad perspective of the organization and its environment across both financial and nonfinancial goals.
- Embrace technology and flexible working practices to optimize the performance of the audit committee.
Go the extra mile to provide reliable and high-quality information and disclosures. This will improve stakeholder understanding, support the credibility of reporting entities, and reduce second guessing in the aftermath of a crisis.
While financial statement audits are typically performed annually, TCWG – especially those working within industries severely disrupted by the pandemic – should consider additional assurance or related service engagements that address issues such as:
- Going concern, including scenario testing of liquidity and solvency;
- Capital preservation measures, including the suspension of dividends;
- Internal control assessments; and
- Valuations and estimates of goodwill, intangibles, inventory, financial instruments, trade receivables, or loan losses.
Maintain robust communication between the board/management and key external stakeholders, including auditors, regulators, consultants, academic/industry experts, rating agencies, and large shareholders. This is especially important in developing business continuity plans.
Crises put companies to the test—spotlighting strategic and structural weaknesses that may be easy to overlook during times of prosperity. TCWG have an essential task to support their employees, investors and a broad range of stakeholders during this unusually stressful time.
The global accountancy profession is here to help, with its public interest mandate, by playing a critical role alongside TCWG in making the reporting ecosystem work. We are committed to doing our part and working with all stakeholders to navigate through current challenges and any future crisis.