Study: How COVID-19 has affected public company financials

Audit Analytics last week issued a report on aspects of public company financial reporting and financial health impacted by COVID-19. The report covered late filings, internal controls, going concerns, and impairment, with the intent of gaining a better understanding of what happened in these areas to provide insight into risks that may reoccur in the future.

The study found the pandemic caused a significant increase in impairment charges but did not change the number of companies reporting going concerns.

Late filings

There was an expectation the pandemic would negatively impact the ability of companies to file their required reports on time. COVID-19 originated at the end of 2019 before spreading globally in early 2020, interfering with year-end and first-quarter reporting for many calendar-year public companies that were dealing with remote working and travel restrictions. The Securities and Exchange Commission (SEC) offered relief for public companies impacted by COVID-19 by providing additional time to file annual and quarterly reports in early 2020.

Audit Analytics found there was an increase in the number of 2019 reports filed late, reversing a four-year trend of improvements in timely filing by public companies. However, without the SEC relief, the number of late filings for both foreign and U.S. companies in the first quarter of 2020 was the lowest of any quarter since the first quarter of 2016. Nearly 1,000 companies took advantage of the SEC relief, and most of them were small companies.

Accelerated filers could not utilize the relief option, because it was not available until March 1, which was after their Feb. 29 filing deadline. The report noted large companies typically are less likely to file reports late.

Internal controls

Because companies experienced changes in how and where employees were working because of COVID-19 restrictions and business shutdowns, updates had to be made to the design and operation of internal controls. When controls were not operating as usual, there was a greater potential for material weaknesses and financial statement misstatements.

The report found of the more than 800 public companies to disclose changes made to their controls in response to the pandemic, more than two-thirds stated the updates were related to personnel. A significantly lower amount cited information technology, including changes made to support remote work. Most of the changes were disclosed in the second and third quarters of 2020, as companies continued to adjust controls over time.

The report noted control environments will likely need to continue to adapt to conditions as they evolve to avoid material weaknesses and potential errors or misstatements.

Impairment charges

The pandemic caused triggering events for many companies, requiring them to assess impairment of assets. Uncertainties and changes in trends and assumptions about future operations and cash flows affected valuations.

There were $518 billion in asset write-downs for impairments disclosed in 2020, with increases in the total charges, the number disclosed, and the number of companies disclosing them, according to the report. The amount was nearly double the 2019 total and significantly higher than the previous five years.

Companies of all sizes reported impairments in 2020, with an increase of 35 percent for non-accelerated filers and smaller reporting companies. The industries with aggregate impairment charges over $100 billion were retail trade; services; and mining, and each had significant increases in 2020 compared with 2019. Impairments related to property, plant, and equipment were the highest, followed by goodwill and other intangible assets.

Going concerns

As COVID-19 had ongoing negative effects on global economies, and many businesses had to scale back or shut down operations, there was an expectation the number of going concern audit opinions would increase. Despite the volatility, the report found overall trends in going concern opinions issued for fiscal year 2019 did not change. The overall level remained at 21 percent for 2017, 2018, and 2019.

Going concern opinions for accelerated filers and smaller reporting companies decreased in 2019, while large accelerated filers had less than a 1 percent increase from 2017 and 2018. The report noted the decreases were not a result of companies that had previously received a going concern opinion no longer filing, but rather there were more clean opinions and fewer new going concern opinions issued.

The report also indicated, based on current data, 2020 will likely have a significant decrease in going concern opinions. This result is attributed to companies’ expectations that any immediate impacts of the pandemic are not expected to have long-term significant impacts.

The report noted a number of issues in going concern opinions in 2019 and 2020 that were more prevalent during the pandemic. These included failures to meet debt covenants and obtain financing, defaults or late payments of debt, and insufficient cash and liquidity concerns.

Because the pandemic has impacted three years of financial reporting and is not over yet, the report indicated heightened risks and changes in control environments are likely to continue. It recommended companies should remain diligent about their internal controls and risk management now and into the future.