In an interview with Compliance Week, Hille Sheppard, partner and co-leader Global Securities and Shareholder Litigation Practice at Sidley Austin, shared her insights on issues public company audit committees need to prepare for during the coronavirus pandemic.

For many public companies, the month of March was a challenging time, with many new operational uncertainties and the first impacts to financial results from the coronavirus. As companies now report first-quarter earnings and prepare quarterly reports, their audit committees must be focused on new operational challenges and compliance risks.

“Audit committees must ask a lot of probing questions of management,” Sheppard said. “How confident are they about internal controls? Can they close the books? How rigorous is the process? Are they getting information from their lines of business?” Any material changes in internal controls over financial reporting are required to be reported in the current quarterly report.

Changes to the economy that have already occurred and are projected to continue are raising accounting questions, especially in the area of asset impairments. Audit committees should bring their perspective about the business to their discussions with management and consult with their auditors about accounting implications of the pandemic. “It is important that they get the information they need and document judgments made and conclusions reached, because there will probably be second guessing,” Sheppard said.

Sheppard recommends that management and audit committees engage their auditors early, more so now than normally. “Although first-quarter results are unaudited, auditors want to be part of the discussions and not be surprised,” she said.

Companies and their audit committees must do the best they can to deal with all of the uncertainties and accurately report their current situation. “Judgments about the future are going to be particularly challenging now,” Sheppard suggests. “They need to do their best to thoughtfully and accurately report their current situation but call it as they see it. The reality is that things could potentially be worse in the second quarter than they anticipated, and they will have to explain what happened and add their perspective to explain why things changed.” Sheppard reminds audit committees that their public reporting should be consistent with what the board has been told.

She also recommends they take a close look at their risk factor disclosures, which serve as a warning to investors but can also be protective, to make sure they accurately describe the current risks. Members of audit committees who serve on multiple boards should bring their perspective from those experiences to that review.

Although the Securities and Exchange Commission has provided certain reporting relief, some companies may not be taking advantage of it. SEC reporting requirements should still be top of mind for audit committees, and known and potential impacts of COVID-19 and forward-looking statements should be disclosed in first-quarter reports. “The SEC is still scrutinizing management’s discussion and analysis, including disclosures on uncertainties about liquidity and changes to financing and capital resources,” Sheppard said. “They are also looking at companies who leave in place earnings guidance from year-end that no longer is supported, even if they had good support at year-end when they did their annual reports, and whether it is really realistic for them to achieve that guidance now.”

Audit committees should be engaged in planning for contingencies and crisis management. Sheppard recommended boards and audit committees should ask questions of management and document the discussions about issues like conserving liquidity and need for new financing, expense reductions, potential talent disruption from reductions in workforce and compensation, management succession planning, and disruptions to supply chain and production processes. “These issues are extremely important. While audit committees do not want to distract management from the difficult job of running companies at this time, they have an obligation to keep themselves informed and can bring the appropriate perspective by asking questions and can provide guidance,” Sheppard said.

Board members and audit committees can help management set the right tone at the top. “Audit committees should remind management to prioritize the health and safety of employees, customers, vendors, and other constituents because it’s the right thing to do and mitigates risks for the company,” Sheppard recommended.

Sidley Austin provides additional advice for boards and audit committees on the company Website, and it has information on regulatory, transactional, and litigation issues companies are facing in its COVID-19 Resource Center.