Implications for Audit Committees Arising from COVID-19
International Federation of Accountants & Institute of Internal Auditors |
The fundamentals of good governance and effective oversight arrangements are all the more important during the COVID-19 crisis, as organizations face significant uncertainty, a rapidly changing risk landscape, and an increased need for transparency and confidence in reported information on its implications.
For audit committees, who are a key component of effective governance, COVID-19 is causing a strategic shift in their roles, with more on their agendas than ever before. But at their core, audit committees play a key role in creating and maintaining a culture and environment that supports the integrity and provision of decision useful information about an organization to its investors and other stakeholders. Transparency is of heightened importance during this time of uncertainty.
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.
To further explore the specific implications for audit committees and their stakeholders arising from COVID-19, IFAC and The Institute of Internal Auditors (IIA) hosted a virtual global audit committee roundtable. Participants included board chairs, audit committee chairs and members, CEOs, and those leading internal audit teams – with representation from Canada, France, Hong Kong, Malaysia, Saudi Arabia, South Africa, Tanzania, Turkey, UK, US, and Zimbabwe.
Key takeaways from the virtual meeting included:
Audit committees are having to be vigilant on an expanding range of issues and review their agendas and priorities in response to COVID-19. But at the same time ensure they can remain firmly focused on their fundamental responsibilities in respect to the oversight of financial reporting and internal controls, which have added complexities arising from the crisis.
Given the level of uncertainty about the economy, fair values, and future earnings of companies over the next 12-18 months, coupled with a shift to remote working, issues top of mind for audit committees include:
Boards are also looking to their audit committees for guidance on a broader set of issues and risks including around people and capacity (keeping people employed and productive, as well as key person dependencies and succession planning), ensuring cost control is not to the detriment of the business and control environment, crisis management and resilience, and disaster recovery plans.
Any additional responsibilities taken on by the audit committee need to be clear and carefully considered to ensure the committee is not overburdened, that it has the right experience and expertise, and that new responsibilities do not detract it from its core oversight responsibilities.
Audit committees are adapting their way of working to function and fulfill their responsibilities without meeting physically. This means embracing virtual meetings and much more frequent communication, particularly with the board, management, internal auditors, and external auditors.
Audit committees rely on actionable and timely information and analysis to effectively carry out their oversight role otherwise they are “flying blind”. The changing nature of the current crisis requires more frequent updates from management. In some cases, this is occurring on a weekly basis on priority issues.
Ongoing engagement with internal auditors and external auditors is also essential, to deal with emerging issues and uncertainties on an ongoing basis as they arise.
Boards are more engaged in matters discussed by the audit committee, particularly given the complexities of financial reporting issues caused by COVID-19 and the speed of response needed, for example to approve decisions or financial reports. Full discussion and deliberation by the board on key aspects of the audit committee’s work is essential, particularly any significant issues identified that warrant the full board’s attention and involvement.
Participants emphasized the importance of a multi-disciplinary approach to good governance, drawing upon expertise and working closely with others. This requires a clear understanding of the respective responsibilities of different groups, including the board, audit committee, management, internal audit, and external audit. Of importance is for boards to understand what audit committees do and the nature of their engagement with auditors, and their own collective responsibilities in relation to the integrity of reporting and ethical conduct needs to be fully appreciated.
Broadly speaking, the current crisis makes the need for connectivity and collaboration across an organization more pressing. Examples highlighted include:
The actions and decisions taken today by companies and their directors in response to COVID-19 will define their reputation and standing in the future. Businesses need to understand and communicate their value propositions to different stakeholders, balancing profit with purpose, and thinking about how the business has, or can have, a social impact and create and preserve value for wider stakeholders.
In the wake of the current crisis, investors are also increasingly asking for more forward-looking information and disclosures. Stakeholders need to understand that boards and their audit committees will be making reasonable judgements in the context and on the basis of information available currently. It is likely that for many companies, judgements were reasonable and supportable at the time, but actual results in the future may differ.
Many organizations report broader information through mandatory and voluntary narrative reporting, but there is room for improvement. To enhance trust and transparency, the audit committee can play a crucial role in respect to broader corporate reporting, overseeing a wider set of business and reporting risks, and assessing the connectivity and consistency between information in the financial statements and other disclosures.