CFOs should be prepared for… an unpredictable year. Disruptions in the supply chain and stock market turmoil will affect the way audit preparation, writing of financial statements, audit fieldwork, and review processes are all conducted. The first clues to how the COVID-19 health crisis may affect financial reporting are expected to show up in Q1â€™s financial statements.
Some of the fallout anticipated by the accounting industry suggests the impact may play out as follows:
- Audit planning will be forced to factor in the epidemic. Planning considerations will need to weigh travel restrictions, staff shortages (yours and your audit firmâ€™s), quarantine, social distancing and mandated closures. Fieldwork will likely need to be done remotely instead of onsite. Auditors may also have difficulty gaining access to the evidence and people needed to support their audit opinion.
- Many financial statement accounts will be affected. Revenue estimates may be affected, specifically those involving variable consideration and other amounts that customers pay. In addition, depreciation expenses for idled facilities should still be recognized.
- Be prepared to write down assets. Companies that believe their operations are being hurt may have to seriously consider making asset impairments. Such claims will need to include detailed disclosures in the notes to their financial statements about reduced revenue and earnings forecasts.
- Management estimates may not be accurate. Many significant accounts, including sales, inventory, and bad debt expenses, will be affected, as will normal business activities such as production and distribution.
- Internal controls may break down. Employee illnesses and office closures may interfere with internal controls. Management may need to implement alternative controls if those in place are not effective.
- Disclosure of subsequent events will be necessary. The notes to the fiscal year 2019 financial statements should include a description of the potential financial impacts of the pandemic on operations and financial markets.
More advice from federal regulators and leading CPA firms on how financial reporting and audits may be affected can be found here.
REDW is committed to keeping you informed at all times, but especially during a crisis of the magnitude of the COVID-19 pandemic.Â Stay connected with us on LinkedIn and @REDWLLC. Or check out some of our other updates here.