As the novel coronavirus (COVID-19) continues to impact the economy, regulators are keeping high-quality financial reporting squarely within their focus. In a public statement last week, Securities and Exchange Commission Chief Accountant Sagar Teotia acknowledged that in “these challenging times, investors and other stakeholders need high-quality financial information more than ever. The proper functioning of our capital markets depends on a regular supply of high-quality financial information that enables investors, lenders, and other stakeholders to make informed decisions.” Similarly, the Public Company Accounting Oversight Board published COVID-19: Reminders for Audits Nearing Completion, which is directed to auditors but has some practical insights for companies and their audit committees.
To date, the SEC has provided a number of COVID-19 accommodations and has indicated that it and the staff are working to assist market participants with financial reporting issues. For instance, the SEC issued an order conditionally extending its temporary 45-day grace period for companies affected by COVID-19 to file Exchange Act reports due through July 1, 2020. The SEC has also issued a number of public statements concerning disclosure considerations with respect to COVID-19, such as the recent April 8 joint statement by SEC Chairman Jay Clayton and Division of Corporation Finance Director William Hinman, The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19.
Mr. Teotia has commented that companies may be required to develop “significant judgments and estimates” when preparing their upcoming financial statements, which may be more difficult in light of COVID-19 uncertainty.1 He also stated that the SEC’s Office of the Chief Accountant (OCA) will continue not to object to “well-reasoned judgments.” Of course, the OCA “stress[es] the importance of [providing] required disclosures of judgments and estimates in these and other areas.” Some significant judgment areas may include the following highlighted by Mr. Teotia:
- Fair value and impairment considerations;
- Debt modifications or restructurings;
- Revenue recognition;
- Income taxes;
- Going concern;
- Subsequent events; and
- Adoption of new accounting standards (e.g., the new credit losses standard).
From an auditing perspective, the PCAOB has highlighted a number of similar areas likely to be affected by COVID-19, which “may present challenges to the auditor’s evaluation of the presentation of the financial statements,” including:
- Subsequent events;
- Going concern;
- Asset valuation, including impairment triggers and related assessments;
- Accounting estimates, including fair value measurements;
- Revenue recognition, including effects of contract modifications;
- Income taxes, including tax valuation allowances;
- Provisions, allowances, and loss contingencies;
- Debt modifications or restructuring;
- Debt covenants, other regulatory ratios, and minimum net capital requirements for broker-dealers; and
- Disclosures, including those pertaining to risks and uncertainties, and liquidity-related disclosures.
The PCAOB has observed that for audits nearing completion, “[a]uditors may face time constraints in completing the audit and challenges in obtaining and evaluating the sufficiency and appropriateness of audit evidence.” The causes for these constraints may include:
- Limitations on access to company personnel;
- Management delays in responding to auditor inquiries; and
- Challenges to engaging with other auditors.
The PCAOB has not yet published observations relating to earlier stage audits or reviews of interim period financial statements, but has suggested that “different or additional challenges may also arise” in those circumstances. Though the PCAOB has issued a reminder to auditors to keep in mind their required communications to audit committees, calendar year companies may want to communicate early and often with their auditors to assess any potential time constraints that may impact the auditors’ review of interim financial statements for upcoming Form 10-Q reporting. As the PCAOB highlighted, audit committees may want to be on the lookout for communications from their auditors regarding the following areas that may be affected by COVID-19:
- Significant changes to the planned audit strategy or the significant risks initially identified, and the reasons for such changes;
- Matters related to accounting policies, practices, and estimates, and the auditor’s evaluation of the quality of the company’s financial reporting, including any significant changes management made to the processes used to develop critical accounting estimates or significant assumptions, a description of management’s reasons for the changes, and the effects of the changes on the financial statements;
- Control-related matters, including significant deficiencies and material weaknesses;
- Matters that are difficult or contentious for which the auditor consulted outside the engagement team and that the auditor reasonably determined are relevant to the audit committee’s oversight of the financial reporting process;
- Matters relating to the auditor’s evaluation of the company’s ability to continue as a going concern; and
- Significant difficulties encountered during the audit.
In addition to the SEC and PCAOB, the Financial Accounting Standards Board is also committed to supporting its stakeholders in navigating the COVID-19 pandemic. During the FASB’s April 8 Board meeting, the FASB staff discussed a number of technical inquiries it had received regarding COVID-19, including with respect to leases, interest income, derivatives and hedging, and fair value measurement. Some of the FASB staff’s views to those questions are set forth in the FASB’s summary of tentative board decisions for the April 8 meeting. Additionally, the FASB staff has issued a more detailed Q&A document on the FASB implementation website with regard to questions about lease concessions related to COVID-19, and the staff is working with stakeholders to provide clarity on the accounting for loans received from the Small Business Administration.
Recent statements and guidance from the SEC, PCAOB, and FASB underscore the challenges to financial reporting that COVID-19 presents and highlight accommodations and other resources available to assist in navigating those challenges. Additional actions, communications or guidance are expected as the COVID-19 pandemic continues to evolve.
1 In his statement, Mr. Teotia also confirmed that the OCA concluded that the narrow exceptions in Sections 4013 and 4014 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for certain financial institutions are in accordance with GAAP and that the SEC staff will not object to an eligible entity’s election to utilize the CARES Act relief and application thereof for the periods during which the elections are available. The relief in these sections relate to suspending troubled debt restructuring accounting under GAAP and electing not to comply with the new current expected credit losses (CECL) accounting standard, respectively, for the temporary periods set forth in the CARES Act.