The COVID-19 pandemic significantly impacts the accountancy profession and the work of professional accountants in their roles across the corporate reporting ecosystem.
The profession needs to play a significant part in the communication of relevant issues arising from COVID-19, and enhancing collaboration across all key players in the ecosystem particularly regulators, standard-setters, companies, auditors, and investors. Given the economic effects of COVID-19, it is more important than ever that we all work together to promote trust, confidence and transparency in corporate reporting which is the foundation for financial stability and effective functioning of capital markets.
Collaboration between these stakeholders at the global and national levels is critical. To help professional accountancy organizations (PAOs) be engaged in multi-stakeholder dialogue, IFAC has compiled key messages to assist PAOs in their stakeholder dialogue. These messages will need to be modified to take into account and address jurisdiction-specific challenges. With additional input from IFAC members and partners, we will continue to update the messaging to reflect and address issues as they arise during the recovery phase.
Accessing Relevant Resources
- During this challenging time, IFAC and its members, the firms, and regulators have been providing guidance to support companies and auditors navigate the challenges around financial reporting and auditing – many of these resources can be accessed on the IFAC COVID-19 resource center. A summary of COVID-19 financial reporting and audit considerations is also available on the IFAC website. A series of webinars will also be held throughout July to address practical audit quality considerations in the pandemic environment. IFAC has also published a statement exploring why the profession’s public interest responsibilities are of particular importance in the context of COVID-19’s challenges.
- Trustworthy corporate (financial and non-financial) information, including forward-looking information, is more important than ever to enable stakeholders to make informed decisions.
- There is unprecedented level of uncertainty about the economic implications of COVID-19 on future earnings, cash flows, and asset/liability values with implications for the going concern basis of accounting, and asset and liability values. These uncertainties will exist for at least the next 12 months and potentially longer.
- Therefore, companies and auditors must exercise significant judgment in the current volatile and uncertain macroeconomic environment.
- PAOs can proactively highlight the challenges for companies and their auditors during the current crisis and the recovery.
Financial Reporting and Audit Implications
- COVID-19 raises specific challenges for preparers of financial statements and for the auditors of those financial statements, particularly in relation to
- Judgments around estimates in the face of significant uncertainty and a fast-changing environment;
- Balancing the timeliness of financial reporting while ensuring it is trustworthy and insightful; and
- The need for changing controls and procedures to reflect remote working and operations.
- Regulators, investors and lenders need to be aware of the challenges faced by management in preparing timely, high-quality information, and for auditors in assessing management judgments and in their own reporting.
- Key areas to highlight and raise awareness include:
- The challenges and significant uncertainties facing companies and their auditors, and highlighting that reasonable judgements should be considered in the context and on the basis of information available currently.
- For professional accountants, reasonable judgments, made in good faith and guided by the sound application of ethical, audit and assurance, and financial reporting standards, should be considered in the context in which they are made and on the basis of information available at that time.
- Those charged with governance (TCWG) and management face significant uncertainty as they make judgements to project future operating results, cash flows, and forward-looking and expanded information and disclosures to help explain an organization’s operating performance, financial position, liquidity and future prospects. Considering the degree of uncertainty, the variability and ranges of reasonable estimates, forecasts and values are likely to be much wider than normal. Transparency on known and material uncertainties, and robust processes and documentation supporting disclosures, help to ensure that decisions are not later subject to question and second-guessing.
- Stakeholders need to be aware that management and auditors use the going concern basis of accounting as defined by the relevant financial reporting and auditing standards, and this could be made clear by regulators to avoid any confusion by investors interpreting going concern more broadly. The IAASB has issued a Staff Audit Practice Alert on Going Concern in the Current Evolving Environment.
- Where regulators have introduced prescriptive requirements dictating standard language for audit reports and opinions, these should not limit professional judgment or effective communication. “Boilerplate” COVID-19 language in auditor reports is not likely to be useful to investors. Investors also need to understand and consider all aspects of the auditor’s report.
- Requirements for the preparation of and assurance on interim reports vary across jurisdictions.
- In some jurisdictions, interim reports are not required to be prepared in accordance with a financial reporting framework, and no assurance is required on them. Some stakeholders may not understand the different levels of assurance provided for interim reviews (limited assurance) versus annual financial statements (reasonable assurance). Auditors involved in interim reporting will need to communicate clearly about the extent of the assurance they obtained on the interim financial information subject to review, as well as any other legal or regulatory reporting responsibilities. The IAASB will be issuing a staff alert on Review Engagements on Interim Financial Reporting in the Current Evolving Environment Due to COVID-19.
- Companies need to be proactive in considering whether interim reporting requirements are sufficient for keeping their stakeholders informed. Additional steps might be warranted to enhance disclosure and transparency.
- IFAC supports early action on the part of regulators to directly engage with companies and provide appropriate guidance—in efforts to support the reporting of high-quality information for shareholders and other stakeholders. In particular, extending reporting and filing deadlines provide relief and should lead to the enhanced quality of disclosures. Such extended deadlines should be utilized when needed to improve the quality and transparency of financial information. However, companies should avoid boilerplate disclosures and use the financial statements, management commentary and wider disclosures as an opportunity to highlight how COVID-19 has impacted/is expected to impact financial performance, financial position and cash flows, and more broadly, how governance, strategy, business models and targets have been modified to address the effects of COVID-19.
- To date little need has been identified for regulatory or standard setting intervention with respect to principles-based auditing and accounting standards as a result of COVID-19. Prompt endorsement by national bodies of the proposed revisions to IFRS 16, Leases, is encouraged. PAOs could usefully monitor the need for additional changes to accommodate current challenges.
- The profession supports globalized and harmonized approaches to responding to the reporting and audit implications of COVID-19. The cost to business of regulatory fragmentation is significant [see Regulatory Divergence: Costs, Risks, Impacts].
Specific Challenges for TCWG and Management
- Ultimate responsibility for preparing and overseeing financial reporting, and for the integrity of information disclosed and communicated to stakeholders, lies with TCWG and management and their responsibilities are not lessened by the conduct of an independent audit. Key considerations in fulfilling their roles include
- Need to proactively respond to the higher risk of financial misrepresentation and fraud (see below on Trust in Profession and Professional Accountants).
- Audit committees need to be engaged and informed and receive actionable and timely information from management so they can effectively carry out their oversight role. This includes the necessary information to maintain oversight of an effective control environment, which will likely change or has changed as a result of adapting operating environments to remote working and other COVID-19 demands.
- Audit committees have more on their agendas than ever before but need to ensure they are well-positioned to execute their fundamental responsibilities in respect to the oversight of financial reporting and internal controls, and new risks arising in the crisis. [see Implications for Audit Committees Arising from COVID-19].
- TCWG may need to obtain additional assurance services for the benefit of shareholders and other stakeholders 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, including goodwill, intangible impairment, financial instruments, trade receivables, or loan losses.
- Use the best available information in making well-reasoned and supported judgements and estimates that take into account the impacts of the COVID-19. To make reasonable and good-faith judgements, management will need to consider whether it needs additional expertise to assist in preparing financial reports and other disclosures.
- Understand their responsibilities to appropriately assess going concern and disclose substantial uncertainty when it exists and plans to mitigate the uncertainty.
- Ensure transparent disclosures on the impact of COVID-19 including
- How fair values and other estimates have been determined, including key inputs and assumptions as well as disclosures of significant non-adjusting post balance sheet events and sensitivity analyses for the key assumptions.
- Forward-looking information with disclosures on significant assumptions.
- Assess effectiveness of internal controls, and implement any changes required, particularly reflecting remote working.
- Ensure that supplemental (“Non-GAAP”) performance measures are used appropriately and not misleading or confusing to stakeholders.
Specific Challenges for Auditors
- Travel restrictions and remote working arrangements affect all businesses and their existing processes, internal controls, and risks (including fraud and cyber risks). They have led to a unique set of challenges. Auditors will need to identify changes or differences in internal controls and revisit preliminary assessments of the operating effectiveness of controls for the purposes of determining whether responses remain appropriate. More than ever, risk assessment needs to be understood as an iterative process that will need to be continuously re-assessed. Key areas include:
- Practical and technical challenges for auditors include physical access to audit locations (i.e., inventory), inability to obtain original documents (i.e. confirmations, vendor invoices), and legal restrictions related to transfer of data (i.e. supervision of group audits)
- Although many firms have made substantial investments in technology and innovation that make the transition to working remotely easier, substantial challenges exist. PAOs may seek support from the national regulators where challenges exist around remote data access and physical documentation. This is particularly the case for smaller firms auditing small and medium-sized business. Dispensation arrangements accommodating social distancing guidelines may be needed to permit physical access to enable auditors to perform audit procedures
- Auditors need to continuously review going concern assessments, and procedures for obtaining sufficient and appropriate audit evidence to support conclusions on estimates, valuation and measurement. Given actual results in the future may differ significantly from those originally estimated by companies, judgments should be considered in the context in which they are made and on the basis of information available at that time, and the auditor’s considerations in relation to management’s judgments need to be properly documented.
- The IAASB issued Staff Audit Practice Alert, Highlighting Matters for Consideration Related to Going Concern in the Current Evolving Environment Due to the Impact of COVID-19. In addition, as part of the implementation support material related to ISA 540 (Revised), the IAASB issued Illustrative Examples for Auditing Simple and Complex Accounting Estimates.
- COVID-19 is likely to result in a rise in modifications to the auditor’s opinion due to material misstatement of the financial statements or more circumstances where there is an inability to obtain sufficient appropriate audit evidence. It is anticipated that there will be more “modified” audit opinions and more “material uncertainties” highlighted in audit reports in relation to going concern, and more “emphasis of matter paragraphs”. In addition, it is expected for listed entities that there will be a rise in Key Audit Matters (KAMs) included by auditors in relation to the impact of COVID-19, for example covering going concern and subsequent events. In terms of auditor reporting, areas that were significant and included KAMs in the prior year will likely require expansion to include the current year audit response in those areas for COVID-19, as well as overall COVID-19 related KAMs. Auditors can also direct users to important sources of additional information and describe the auditing challenges and how the auditor has addressed them.
- The IAASB issued Staff Audit Practice Alerts Highlighting Matters for Consideration Related to Auditor Reporting in the Current Evolving Environment Due to COVID-19, and Audit Considerations for Subsequent Events.
- Specialists’ resources, who are typically a part of the multidisciplinary model, are helping auditors when assessing complex estimates and cash flow projections. However, resources such as valuation experts, upon whom management and auditors often rely for assistance in determining the fair value of assets such as real estate, are also uncertain about future markets.
- It is important for the regulators to engage with auditors to understand the auditors’ approaches under current circumstances. Regulatory support for relevant guidance from accounting firms and/or PAOs would be helpful in addition to the guidance and examples of acceptable practices highlighted by regulators.
- While small and medium practices (SMPs) may still be in a ‘fire-fighting’ phase of helping their clients with COVID-19 impacts, they will continue to adapt how they operate, embrace technology and provide relevant value-added services.
- To help SMPs on this journey, IFAC has issued a Practice Transformation Action Plan – A Roadmap to the Future and a practice transformation resource center featuring examples of how IFAC members are supporting their firms to innovate. In addition, small businesses have been disproportionately affected by the COVID-19. IFAC’s Small Business Continuity Checklist – How to Survive and Thrive Post Covid-19 covers key financial management and strategic management tasks to help support small business.
Specific Challenges for the Public Sector
- Most governments have taken swift action to tackle the combination of major simultaneous public health and economic crises. The scale of these interventions means that COVID will also have profound and long-lasting impacts on government finances. High-quality accrual-based financial reports will be needed to ensure that all stakeholders, from everyday taxpayers and recipients of government services, to policy makers, businesses, and investors, receive reliable and transparent information about their government’s activities and their financial position, including liabilities. The adoption of accrual-based financial reporting will help ensure public finances are managed with the quality of information that is routinely available in the corporate sector. Governments’ financial positions are far too complex to be managed using information that focuses almost exclusively on cashflows and debt.
- By providing the complete picture of the state of a government’s finances necessary for robust future fiscal projections, high-quality financial reports based on international public sector accounting standards (IPSAS) can help politicians make the right long-term choices for their countries that will be even more essential in the demanding post COVID-19 world.
- The staff of the International Public Sector Accounting Standards Board issued a questions and answers publication to provide insight into the financial reporting issues associated with COVID-19 government responses, and relevant IPSAS guidance available.
- In the aftermath of a crisis, Supreme Audit Institutions (SAIs) will need to provide assurance on the use of government and donor funds and assess the efficiency and effectiveness of national responses. The work of SAIs is important for both accountability and for identifying lessons for the future. The INTOSAI Development initiative launched 3i-COVID-19 Response Actions resource center to provide guidance, interaction and support to SAIs in conducting financial, performance and compliance audits in COVID-19 times.
Trust in the Profession and Professional Accountants
- The public interest responsibility of professional accountants will be under greater scrutiny during COVID-19. To this end, IFAC issued a statement to all professional accountants highlighting their public interest responsibilities in an age of COVID-19 in which it is important to exercise high levels of diligence, integrity, and professional judgment in the performance to combat higher risks of financial misrepresentation and fraud, and to help ensure business resilience.
- Specifically, the call to action urges all professional accountants whether serving as board directors, organizational leaders, advisers, preparers or auditors to
- Be more alert than ever to the integrity of financial reporting and audit, and the possibility of fraud (see Reporting and Fraud Risk Arising from COVID-19 Pose Significant Challenges for Professional Accountants); and
- Be mindful of their ethical responsibilities and to seek support when needed.
- IESBA staff have also released COVID-19 Q&As highlighting key ethics and independence considerations.