COVID-19 continues to dominate financial reporting. Organisations have to balance the unprecedented situation while providing timely information to capital markets.
As always, investors are firmly focused on the future. They are looking past 2020 and even 2021, assessing companies’ prospects in the medium-term as the world eventually recovers from the pandemic. Yet that assessment will be based on what many companies are reporting in their interim results and year-end financial statements.
We held a discussion with investors and analysts to hear their views, and outline our areas of focus as auditors in the recent reporting season.
Accounting and reporting considerations
Dichotomy of views on speed versus quality of reporting
Some investors agree — very much in line with the FCA and FRC in the UK — that delays in financial reporting due to COVID-19 restrictions are tolerable in the interest of delivering high-quality information to capital markets. They believe that organisations delaying financial information should not be looked upon with the same suspicion that would arise under the ‘old normal’.
Others believe that delay in and of itself reduces the value of the information being provided. The speed of reporting, particularly on forward-looking information is of crucial importance during the pandemic.
Of course, it is worth highlighting companies’ obligation to report price-sensitive information on a timely basis, irrespective of what the formal reporting schedule may require.
Companies need to provide updates on the underlying drivers of revenue
Investors do agree that they also need to give a breakdown of what has happened in recent months, set against the company’s expectations for the coming months.
The main accounting impacts of COVID-19 are related to the general uncertainty over what the future holds for companies. The situation raises questions for both preparers and users of financial statements in the following areas:
- Carrying values of assets on companies’ balance sheets
- Changes in liabilities
- Revenue
- Reporting COVID-19-related costs and impacts on earnings.
There are also some new developments for companies to consider. For example, first-time or unusual transactions that businesses are undergoing due to the pandemic. These may include government funding, income tax concessions, insurance recoveries, and accounting for leases and rent concessions. It’s important that companies provide clear disclosures in these new areas to aid investor decision-making.
Outside the financial statements, there are several areas in which companies are encouraged to provide meaningful disclosures. These include alternative performance measures and other metrics in the front end of corporate reports (particularly the new ones related to the pandemic), disclosures on going concern and information on how company management is protecting value within the business.
Auditing considerations
Disclosures of material uncertainties are becoming more common amid the pandemic. On one particular day in the April results season, one of our audit partners commented that seeing disclosures of material uncertainties for around half of the companies reporting that day, a sharp increase from the 1-2% of companies that make such disclosures in more conventional times.
Although the level of uncertainty has increased, our fundamental obligation as auditors does not change because of COVID-19; and of course, the auditing standards that we work to remain the same. That said, there are clear impacts on the work of auditors as a result of the pandemic.
- High uncertainty: The uncertainty that the pandemic brings with it requires us to approach our audit work with a greater degree of professional scepticism and challenge.
- Historical results have lower predictive value: Accounting judgements or estimates that rely on forecasts or planned future activities are much harder to assess as the historical track record is no longer the yardstick of what the future might hold.
- Practical challenges to execution: Physically distant audit engagement teams and lack of access to certain key locations pose practical challenges to completing audits and reviews. The auditor’s responsibilities can be divided broadly into six areas. Here is an analysis of how the auditor’s work and areas of focus have changed amid COVID-19.
Area |
Standard audit approach |
Impact of COVID-19 |
Risk assessment |
We look at the company’s operating environment and assess where the risks to the financial statements are most likely to occur. This is the foundation of our audit work and drives our audit approach.
|
The focus of our risk assessment has shifted significantly, particularly regarding impairment and going concern.
|
Control environment |
We look at entity-level controls, which govern management tone at the top; and process- level controls, which govern specific classes of transactions.
Wherever possible, we seek to rely on elements of the controls of the business being audited by testing their design and implementation, and whether they are operating effectively.
|
Even the most robust control environment will be under strain in the current circumstances and may lead to a different approach to the testing and use of controls, with potentially more reliance placed on detailed substantive testing.
|
Obtaining evidence |
Sharing large amounts of data via technology has been the norm for a while, but there are a number of areas where this is not the case e.g. reviewing confidential files, physical inventory counts, or reviews of work performed by component/other auditors.
|
It has become more challenging to assess how companies have been able to collate and retain important evidence with everyone working remotely.
There are questions on how disciplined companies have been in retaining monthly reconciliations, supporting schedules and other necessary documents required for the audit. In response, we have used technology and video conference calls to obtain evidence in new ways –e.g. inventory counts performed via video call. |
Technology and data |
Audit of the IT control environment, along with an increasing reliance on data and analytics in the audit, has long featured in the work of the modern-day auditor. Remote working at a much larger scale during the pandemic has accelerated this.
|
The pandemic raises the risk that the IT control environment has been compromised – d —– an area of greater focus for us. It also requires auditors to be more innovative in the way they use technology – , – e.g. using video technology to complete the audit.
Our strategy already focuses on greater use of data and analytics, which means we are well positioned to respond in this area.
|
Judgements and estimates |
Judgements and estimates made by company management rely on assumptions about the future. Auditing these and assessing the underlying assumptions, with reference to historical data, is core to the job of the auditor.
Auditors must apply a sceptical mindset and seek to find disconfirming evidence. The challenge in 2020 is that the historical data auditors would normally rely on is becoming increasingly irrelevant. Investors welcome more detail in the disclosures of estimates and the assumptions made by management.
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While various video conferencing and collaboration apps, which have recently proliferated, work well, they do not completely replace face-to-face interaction. As auditors, ensuring frequent virtual contact and communication with the company being audited is critical.
|
Law and regulations |
Compliance with laws and regulations remains a key area of focus for auditors. Non-compliance by a company could result in a material misstatement of the financial statements.
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COVID-19 increases the risk of a breach in law and regulations by companies, particularly with new laws and regulations being introduced in response to the pandemic. As auditors, we consider these risks as part of our overall audit approach.
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It is clear that COVID-19 has impacted the auditor’s workload — investors can be assured that our auditors are raising their efforts to meet the challenge.
About KPMG Investor Insights
Our Financial Reporting and Audit Quality roundtable session with investors and analysts was held on 28 July 2020. It is one of a series of investor outreach events we hold to discuss and share perspectives on how corporate reporting, auditing and assurance, and stewardship can evolve to meet investors’ needs today and in the future. To find out more, visit our web page or follow KPMG Investor Insights on LinkedIn.
