As we enter another week of uncertainty surrounding COVID-19 and its unquantifiable impacts, it’s becoming increasingly evident that no one knows what to expect. This is especially true for companies and businesses, as well as auditors. Fortunately, U.S. regulatory authorities have been diligent in providing resources and guidance surrounding the pandemic, in addition to offering assistance in various ways to deal with these unprecedented times.
On April 2, the PCAOB released COVID-19: Reminders for Audits Nearing Completion, a spotlight emphasizing the obligations auditors have with PCAOB standards and rules, as well as other applicable regulatory and professional requirements. The spotlight is meant to serve as a reminder to audit firms to exercise professional care while performing audits, which requires that auditors exercise professional skepticism, especially in the midst of a global pandemic.
The spotlight is comprised of five sections:
- Auditors’ Responsibilities to Identify, Assess, and Respond to Risks of Material Misstatement;
- Audit Committee Communications;
- Auditor’s Report;
- Quality Control Considerations; and
- Other Resources
In short, the spotlight focuses on the auditor’s ability to identify the risks of material misstatement – due to error or fraud – and the large role it plays in the effectiveness of a risk-based audit approach. The PCAOB reminds auditors that “opinions on financial statements and, if applicable, internal control over financial reporting, need to be supported by sufficient appropriate evidence that provides a reasonable basis for those opinion(s).”
Given the unprecedented impacts of coronavirus, the audit process may be significantly altered. According to the spotlight, auditors may face time constraints in completing the audit, as well as challenges in obtaining and evaluating the sufficiency and appropriateness of audit evidence including:
- Limited availability of, or access to, company personnel;
- Delays by management in responding to auditor’s inquiries; or
- Challenges in access to, or communicating with, other auditors.
The PCAOB offers suggestions in modifying audit procedures or designing new procedures, which include enhancing direction and supervision of less experienced team members, increasing the involvement of more senior or experienced members of the engagement team, and involving specialists. Additionally, the PCAOB suggests incorporating the use of technology (when possible) in developing alternative approaches for direction and supervision where previous plans involved travel and in-person interactions.
The spotlight also explains that auditors may need to challenge or revise previous risk assessments in light of the COVID-19 crisis for certain financial statement areas. Some financial statement areas may present challenges to the auditor’s evaluation of the presentation of the financial statements, including the disclosures. For example:
- Subsequent events;
- Going concern;
- Asset valuation, including impairment triggers and related assessments;
- Accounting estimates, including fair value measurements;
- Revenue recognition, including effects of contract modifications;
- Income taxes, including tax valuation allowances;
- Provisions, allowances, and loss contingencies;
- Debt modifications or restructuring;
- Debt covenants, other regulatory ratios, and minimum net capital requirements for broker-dealers; and
- Disclosures, including those pertaining to risks and uncertainties, and liquidity-related disclosures.
Additionally, the PCAOB stresses the importance of required communications to the audit committee, especially during this time. Examples of matters that may be impacted by COVID-19 and should be communicated to the audit committee can be found here.
And, of course, firms should be vigilant when considering how the impacts of COVID-19 may affect the auditor’s report.
“While the COVID-19 crisis may not itself be a CAM, it may be a principal consideration in the auditor’s determination as to whether one or more CAM(s) exist, and may also affect how CAMs were addressed in the audit. Additionally, the significance of the impacts of COVID-19 may warrant including additional elements in the auditor’s report, such as explanatory language or an explanatory paragraph when there is substantial doubt about the ability of the company to continue as a going concern.”
In a related effort to relieve some of the pressure caused by challenges during the pandemic, the PCAOB has opted to provide a 45-day relief period from inspections for audit firms, with the exception of providing requested documentation for certain engagements. However, the PCAOB expects to fully resume inspections beginning on May 11, 2020.
Following the PCAOB spotlight emphasizing the importance of audit firm responsibilities, the Chief Accountant of the U.S. Securities and Exchange Commission (SEC), Sagar Teotia, issued a statement on April 3 related to the importance of high-quality financial reporting in light of the significant impacts of COVID-19.
“As we face these challenging times, investors and other stakeholders need high-quality financial information more than ever. The proper functioning of our capital markets depends on a regular supply of high-quality financial information that enables investors, lenders, and other stakeholders to make informed decisions. Although markets and companies face uncertainties, we have a robust and longstanding financial reporting system in place, including the accounting, disclosure, and auditing models that will help us to address recent challenges.”
The statement from the Office of the Chief Accountant (OCA) highlights its active collaborations with the PCAOB, Financial Accounting Standards Board (FASB), and International Accounting Standards Board (IASB) to address emerging issues relating to the effects of COVID-19. It also cites guidance issued by the Division of Corporation Finance a week prior, which aims to help companies as they asses coronavirus-related impacts and their disclosure obligations.
As mentioned in a previous post, the SEC has provided relief for registrants affected by COVID-19. The extended 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 more than 350 companies that have opted to take advantage of the SEC regulatory relief. 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.
Again, it’s very difficult to determine just how far-reaching the effects of COVID-19 will be. Thankfully, many ancillary services and organizations are providing as many resources as possible to aid in the navigation of these uncharted waters.
In his closing statement, Teotia explains:
“We know that these are unprecedented times and understand the challenges stakeholders are facing as a result of COVID-19. However, our financial reporting structure is strong, thanks to the collective work of all participants in fulfilling each of our unique roles with integrity and transparency. We have faced significant challenges in the past, and have always continued to work for investors to provide them with relevant, useful, and timely financial reporting. We in OCA urge all participants in the financial reporting system to continue to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty. We are proud of the strength that the financial reporting system has demonstrated to date, and are committed to supporting companies, auditors, and others in facing the challenges to come.”
For more information on this post or any of our coronavirus coverage, please contact us.