Concerns have been raised by auditors about the significant backlog of annual reports caused by the social restrictions and economic effect of the Coronavirus pandemic. The UK's financial regulators are now scrutinising how many listed companies may have to publish forewarnings about their fiscal health and, consequently, their ability to survive the ramifications of the virus.
Various authorities, including the Financial Conduct Authority, have encouraged the audit profession to engage with them in an effort to establish the potential magnitude of the problem. The Institute of Chartered Accountants in England and Wales believes there will be a significant impact on company financial statements for which auditors cannot obtain the evidence required to sign off the Accounts.
Clients are anxious to understand the impact this will have on their business, for example, will they be able to remain trading or are they at risk of breaching lending agreements? It is therefore likely that accountants will come under significant pressure from their clients either to rush through the signing off of Accounts or to provide advice potentially outside their area of expertise.
Implications for an auditor's assessment of 'going concern' may include a focus on current and future audits given the uncertainty about the global fiscal position and predictions. Companies may have to review all areas of accounts that are subject to judgment, in addition to the going concern, including the impact of breaches of covenants, onerous contract provisions, restructuring plans and funding.
Expanding disclosures may also be a challenging area as auditors look to ensure a client's disclosure appropriately describes the company's prospects and how stakeholders might be affected. Auditors may consider their responsibilities in relation to other information presented by the client, with the financial statement resulting in a qualified opinion or a disclaimer of opinion because of various limitations (i.e. when unable to obtain sufficient or appropriate audit evidence).
Factors for auditors to consider
Further risk assessments may have to be considered and also whether assessments should be revised due to new risks emerging. The fluctuating landscape means risk assessments may be continually revisited during the audit.
Another consideration may be the difficulties the client has in preparing future projections due to the uncertain situation. These projections could change significantly in a short timeframe. Regulators suggest auditors use professional judgement and sceptism, exercising care to ensure that any projections reflect the situation when an audit report is to be signed.
Ultimately, auditors may have to change their approach to audit and develop alternative procedures. The consequences of social distancing mean there will probably be a greater reliance on technology, sharing data and hosting virtual conferences. This, of course, comes with its own risks related to cybercrime and the GDPR.
Professional guidance recommends proactivity and early engagement with clients. Auditors should discuss the impact of the pandemic on the company, its reporting timetable and audit timetable, including any contingency plans.
From a risk management perspective, it is crucial to keep detailed records of instructions and any subsequent change in those instructions which has been agreed. Keeping records of phone conversations with clients is also key.
Should a misguided claim be made against you, having contemporaneous records of all interactions with the client makes it easier to defend the claim.
If you have concerns over timescales for completing audits or accessing documents, it may be prudent to communicate this to the client (including the possible implications) in writing with an agreed course of action.
Lastly, when the audit cannot be performed at all, for instance because of confinement, it is recommended that you contact the relevant regulator for advice on next steps.
If you would like to discuss any of the issues outlined in this article, please to do not hesitate to contact your Account Executive or Claims Advocate.