Regulating for Recovery: How Regulators Help Sustain Confidence through a Crisis
July 20, 2020
Regulatory bodies that oversee corporate reporting serve to protect the interests of investors and other stakeholders who rely on the information companies provide. Regulators play a central role in ensuring a well-functioning corporate reporting ecosystem that makes this information high-quality and reliable, fostering trust in individual companies and thereby the broader market.
Especially in uncertain times, regulators must embrace their prudential role to engender confidence. 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, regulators may consider the following actions.
Build a wholistic response founded on ethics and governance. After a crisis, there are often calls for new regulations to “fix” past problems. But, the importance of strengthening governance and sharpening the focus on ethical behavior—in combination with effective prudential oversight and refinements in regulatory requirements—cannot be overstated.
Collaborate with companies, auditors, and other critical service providers. Management teams may struggle with assumptions, estimates, and judgments in the face of uncertainty and volatility. Uncertainties may raise questions about going concern.
In anticipation of these challenges, regulators can play a key role by helping to inform the expectations of markets, investors, and other stakeholders in a way that reflects the unusual circumstances of the moment. This requires engaging in direct, multi-stakeholder dialogue with corporates, investors, and various constituents of the accountancy profession to proactively identify and improve understanding of crisis-related issues and impacts.
Dialogue across jurisdictions can and should take place to avoid regulatory fragmentation. Taking proactive steps to establish these robust stakeholder networks will help achieve crisis-readiness.
Support principles-based financial reporting standards, which provide the most effective framework for reporting relevant and comparable information, regardless of company, industry, country or market-specific circumstances, including in times of crisis. Compliance with standards and regulatory requirements is important, even if delays in filings are required to ensure reported information is high-quality.
Evaluate whether jurisdiction-specific requirements should be enhanced—including frequency of reporting (i.e., quarterly, semiannually, or annually)—while balancing the operational impact of reporting enhancements with the need for sufficient and transparent information.
Evaluate whether certain reporting entities should report on their resiliency. This may take shape in an annual “resiliency assessment” which looks at critical factors for success of the business, inherent vulnerabilities and dependencies in the business model, and reasonable crisis/back-up contingency policies developed by management. All of this would be consistent with an Integrated Reporting Framework approach.
Crises put companies to the test—spotlighting strategic and structural weaknesses or dependencies that may be easy to overlook during times of prosperity. In this context, regulators play an essential role in supporting the economies in which they operate. An outcomes-focused approach, proportionate to specific circumstances, will support confidence in companies, markets and economies.
The global accountancy profession, with its public interest mandate, plays a critical role alongside regulators in making the reporting ecosystem work. We are committed to doing our part and working with regulators and other stakeholders to navigate through current challenges and any future crisis.