Auditors are confronting significant challenges as they focus on maintaining audit quality during the coronavirus pandemic. Julie Bell Lindsay, the executive director at the Center for Audit Quality, meets regularly with CAQ member firms and the governing board. Below are some of the issues those firms are reporting.
Working in a virtual environment: Although the coronavirus pandemic is still evolving, the audit profession is continuing to focus on the safety and well-being of its employees. Working remotely makes their job more difficult, but they are adapting and maintaining high standards of quality and professional skepticism while working in a virtual environment.
“Auditors continue to serve as a critical link in the capital markets system, serving as the go between for company management, board members and audit committees, and regulators,” Lindsay said. They also continuously engage with regulators to keep them informed about what the profession is doing to respond to these challenging times.
Securities and Exchange Commission reporting relief: Member firms are monitoring whether companies are taking advantage of the SEC order that extended deadlines for filing annual and quarterly reports due before July 1, 2020. The SEC recognized companies and their auditors may need more time to address the unprecedented economic uncertainties and new accounting challenges that resulted from the pandemic, including use of estimates, fair value, cash flow forecasts, going concern, and accounting for new government financial support.
“What we heard from our member firms is that relatively few public companies have taken advantage of the regulatory relief,” Lindsay said. Larger companies have financial reporting processes and infrastructure that enabled them to adapt quickly to the new environment and close the books remotely, and/or their operations were not as significantly impacted by COVID-19 through the end of their reporting periods so far this year. But some smaller public companies did extend their filing dates, which gave them and their auditors additional needed time. “I want to stress, from what we are hearing, it is not a slowing down just to slow things down,” Lindsay said. “It’s that COVID-19 adds uncertainties and complexities that just take longer.” It is not yet known whether the SEC will extend the time period for relief for subsequent reporting and whether more public companies will take advantage of any new extensions.
Internal controls over financial reporting: Some business locations have closed, employees are working remotely, and employees have been furloughed. But the existing requirement for company officers to assess changes and certify the effectiveness of their ICFR in each annual and quarterly report has not changed.
Member firms have observed a lower level of disclosures about changes in ICFR for public companies than they had speculated there would be at the beginning of the pandemic. “What we have heard is that while companies are making incremental changes in internal controls to adapt to the new remote environment, most public companies are not concluding the changes they have made are material changes to ICFR that would necessitate disclosure,” Lindsay said. In subsequent quarter’s reports, additional changes to ICFR will need to be evaluated and disclosed if material.
Going concerns: Public companies of all sizes are facing evaluation of going concern for the first time as a result of the coronavirus. “Certain businesses, like retail and hospitality, are facing challenges they have never seen before,” Lindsay said. For many calendar year-end companies, their year-end 2019 and first-quarter 2020 reporting included little or no significant impacts of COVID-19. But as the economic challenges continue, it is likely that more companies and their auditors will need to evaluate and report on going concern in subsequent periods during this year.
The CAQ Website has additional information about these and other accounting and reporting issues arising from COVID-19 for public companies and their auditors.