Coronavirus Continues to Impact Financial Reporting

Last week, Audit Analytics posted two analyses looking at the effects of coronavirus we have seen on financial reporting across the US, Canada, and Europe. Coming as no surprise, we have more updates on important disclosures from public companies that reference the illness and the associated impacts.

On Tuesday, March 24th, the Public Company Accounting Oversight Board (PCAOB) announced that it is providing PCAOB-registered audit firms with a 45- day relief period from inspections, with the exception of providing access to audit documentation for certain engagements. The PCAOB expects to fully resume inspections beginning May 11, 2020. Audit firms that seek to take advantage of the relief period should reach out to their designated inspections point of contact.

On Wednesday, March 25th, the SEC announced that it was extending the filing periods covered by its previously enacted regulatory relief for certain public company filing obligations. The previously announced relief originally provided affected companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. The updated aid provides companies (meeting specific criteria) with a 45- day extension to file certain disclosure reports that would have otherwise been due between March 1 and July 1, 2020. For most companies, this extension delays filings for the first two quarters of 2020.

Currently, Audit Analytics has identified 75 companies that have opted to take advantage of the SEC regulatory relief – almost three times as many as the 26 we last reported. Several others have also disclosed they would be delaying their financial statements due to, or in part of, COVID-19, without referencing the SEC regulatory relief. These numbers will most likely continue to increase as we approach another filing deadline next Tuesday.

We’ve also come across the first US audit opinions citing the coronavirus pandemic.

The audit opinions of Town Sports International Holdings Inc [Nasdaq: CLUB] and Novation Companies [OTC: NOVC] both referenced COVID-19 as a contributing factor to the material uncertainty related to the ability to continue as a going concern. As mentioned in last week’s post, we’ve already seen going concerns in Europe triggered by the pandemic.

As a reminder, a going concern modification is the expressed uncertainty that a company is able to continue in the near future. Generally speaking, this uncertainty relates to whether the company will exist for another 12 months.

Meanwhile, the audit opinion of Innovative Designs, Inc. [OTC: IVDN] has a going concern unrelated to impacts of the coronavirus, although COVID-19 is mentioned in the auditor’s report.

Emphasis of Matter

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In early 2020, an outbreak of a novel strain of coronavirus was identified and infections have been found in a number of countries around the world, including the United States. The coronavirus and its impact on trade including customer demand, travel, employee productivity, supply chain, and other economic activities has had, and may continue to have, a significant effect on financial markets and business activity. The extent of the impact of the coronavirus on our operational and financial performance is currently uncertain and cannot be predicted.

Other audit opinions mentioning COVID-19 include NorthStar Healthcare Income, Inc., Movado Group Inc [NYSE: MOV], and Nordstrom [NYSE: JWN]. Nordstrom’s opinion notes, “the Company announced the temporary closure of its stores in the U.S. and Canada for two weeks in response to the novel coronavirus (COVID-19) and that the impacts of COVID-19 may have a material adverse impact on its results of operations, financial position and cash flows in 2020. Additionally, the Company drew $800 million on its Revolver in March 2020.”

Nordstrom is one of many large retailers to voluntarily shut its doors temporarily to help prevent the spread of the coronavirus. Therefore, it’s very likely that this is just the start of audit opinions containing such language, particularly in light of the number of disclosures referencing the coronavirus or COVID-19 that has continued to grow:

During these unsettling and uncertain times, it’s overtly obvious that no one knows what to expect; this is especially true for companies and businesses, alike. Thankfully, many ancillary services and organizations are providing as many resources as possible to aid in the navigation of these uncharted waters.

For example, each of the Big Four audit firms have dedicated sections of their websites to the pandemic:

The NACD (National Association of Corporate Directors) has created an online portal (open to non-members) offering guidance and recommendations in responding to the coronavirus crisis. Here, board members can find helpful information to confront COVID-19 and mitigate the impacts it has on the business.

Similarly, Accountancy Europe has also made online resources available to accounting professionals, aimed to help ease the navigation of the coronavirus – acknowledging its unknown impact on the society, economy, and our daily lives.

Audit Analytics will continue to monitor disclosures regarding impacts of the coronavirus on US and foreign public companies and the subsequent effects on the economy overall.

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