By Soyoung Ho
With unprecedented economic challenges in modern American history because of the COVID-19 pandemic, corporate accountants and auditors are also facing unique challenges.
In order to contain the spread of the novel coronavirus, most people had to largely stay at home in the past several weeks, although some states are slowly lifting some restrictions on gatherings and movements. But the stay-at-home orders have had a devastating effect on the economy as many businesses had to shut down their operations. In response, Congress has passed stimulus packages to try to avert a complete economic meltdown.
At the same time, the SEC has been granting temporary regulatory relief for public companies as they handle the challenges of their employees working remotely and massive disruptions to their business operations. And during a May 4, 2020, virtual meeting of the SEC’s Investor Advisory Committee (IAC), panel member J.W. Verret, a law professor at George Mason University, said the SEC’s Office of the Chief Accountant (OCA) is “dealing with some unique accounting issues we have never seen before and trying to keep a handle on some, I think, impossible problems right now, like estimating going concern and impairment issues. I just don’t know how you make estimates like that in this environment.”
Under U.S. accounting rules, management must alert investors if there is “substantial doubt” about the company’s survival—its “going concern.” In defining substantial doubt, the rule uses a threshold of “probable” that a company will not be able to pay debts as they come due during the next 12 months. Auditors then must assess the company’s prospects for staying in business. If there is substantial doubt about the company’s viability, the auditor needs to report it in its opinion.
In terms of impairment, it is difficult to determine whether an asset is permanently or temporarily impaired because no one knows exactly what the exact effect of COVID-19 will be on the economy.
“In times of less volatility and less certainty, normally management will be able to prepare cash projections and scenarios and things like that to support its assessment of its ability to continue as a going concern,” AICPA Chief Auditor Bob Dohrer said in a May 5 interview. “Some of the biggest issues we are dealing with is in this time of great uncertainty and volatility, it’s just difficult to have a crystal ball and look … into the future.”
Guidance from Regulators and Standard-Setters
In response to the impacts of COVID-19, accounting and auditing standard-setters have delayed effective dates of some pending changes in standards not to overwhelm accountants and auditors. In early April, SEC Chief Accountant Sagar Teotia said in a statement that OCA also stands ready to help companies when they face complex accounting, financial reporting, independence, and auditing issues.
In addition, the AICPA in April issued FAQs—Audit Matters and Auditor Reporting Issues Related to COVID-19, which responds to thousands of frequently asked questions that accountants and auditors might have.
For example, “the ability to continue as a going concern is affected by many factors, including the industry and geographic area in which the entity operates, the financial health of customers and suppliers of the entity, and the accessibility to financing that is available for the entity,” the AICPA guide notes. “The consequences of COVID-19 may impact those factors and may cause a deterioration in an entity’s operating results and financial position.”
Moreover, the FAQs said that auditors should keep in mind that management’s assumptions “are just that and, in these times of uncertainty, making some of these evaluations or forecasts might be difficult so, in many cases, management’s best estimate would be acceptable and may not result in a scope limitation.”
Still, Matthew Derba, a partner in CohnReznick LLP’s New York office and a member of the firm’s National Assurance Practice, said that it is important for companies to be as transparent as possible to investors.
“It’s important that, in my opinion, reporting entities should be not looking to paint the best picture but looking to paint a realistic picture. I am not saying doom and gloom, I don’t think the world is going to end…. I think we are going to get through this, it’s going to be painful,” he said on May 7. “But I think this is a time when reporting entities should think about things and really be realistic, transparent about what they are talking about, and make sure in their financial reporting that they are clear about ‘hey, these are estimates, and these are the uncertainties associated with the estimates and really make sure they disclose risk factors maybe in their critical accounting policies.”
Going Concern Disclosures So Far
According to an analysis by the Center for Audit Quality (CAQ), an affiliate of the AICPA which represents auditors of public companies, most of the companies that filed first-quarter reports or annual reports in the past month with going concern disclosures already had experienced financial troubles before the pandemic. But it appears to have accelerated their financial distress.
Also, most companies that recently filed first quarter financial results only had a few weeks of COVID-19 impact on their financial results through the end of March, “so, the balance sheets still looked pretty healthy and a going concern analysis at this time may not yet show the whole picture,” according to the CAQ. But the organization said that second quarter filings could be much grimmer.
Further, the CAQ found that—as of May 8—while companies are making some changes to their internal control over financial reporting (ICFR) because of the crisis, it does not appear that the controls are materially affecting ICFR that would require disclosure.
Fluctuating Cycle
In the meantime, the AICPA’s Dohrer said that since the FAQs were last updated on April 15, some have transitioned from immediate dire concerns to the after-effects of the crisis, such as going concern, impairment of long-lived assets.
“But some of the immediate concerns that we have seen likely very well may resurface as we get to the June 30 year-ends,” Dohrer said. “So, I think we are going to see this kind of cycle continue may be into the next year where certain year-end or right at year-end is likely that some audit issues will be more important than others. And we will pass those, and we will come back to the accounting and going concern things like that.”
This article originally appeared in the May 13, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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