Going Concerned: Key Considerations for Financial Statement Preparers During this Pandemic

FEI Daily speaks to PwC Vice Chair, US and Mexico Assurance Leader Wes Bricker on the top things financial leaders and audit committees need to consider right now.

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FEI Daily: What challenges have arisen in performing external audits during this pandemic?

Wes Bricker: First we’ve been focused on continuing to deliver high-quality audits; that is our starting point. We’re focused on our purpose, which is to build trust in society and solve important problems. In part, we’re doing that through audit services, which help investors and other stakeholders make decisions about important matters with the confidence that our auditors have looked at the numbers.

Our ability to continue to deliver is enabled by the upskilling all of our people around digital tools and technologies and being able to interpret the results.

We have digital skillsets that are essential to delivering on a virtual basis. In our case, audits can be delivered without a physical presence in nearly all instances. Our ability to deliver virtually starts with our people but then extends to the technology our people have at their fingertips:

  1. to connect with our clients through PwC technology;
  2. to using technology to expand the reach of the audit by looking at data in different ways; and
  3. to helping us accumulate insights for audit committees and other stakeholders.  

The first piece is people, the second piece is technology, and the third piece is all that work that we have done to re-imagine what the audit is in a way that enables both our people and machines to work together to deliver data-driven decisions and provide high-quality audits. These three things are framing points to the question of how we’re thinking about the pandemic. We are thinking about continuing to serve our role and make full use of the investments we have made that enable us to continue to fulfill our purpose.

FEI Daily: What are the things CFOs need to be discussing with audit committees right now? 

Bricker: Audit committees and management teams need to have focus on the issues that really matter. So, those would be the complex, difficult or even riskier areas that require focused attention – topics like potential impairments, the ability of the business to continue as a going concern or other areas. Another area stems around the impact of changes in working practices on the internal controls that are so important to the reliability of the financial reporting process and the credibility of the financial statements.

One of the other things that audit committees and CFOs need to be mindful about is setting the right tone at the top and ensuring that the tone is clear. This is particularly important during this period of uncertainty that many businesses are operating within. Being clear that the tone that permeates the entire company is one that emphasizes the importance of high-quality financial reporting, speaking up and being heard if there are issues that require attention in order a failure within the reporting process and continuing to monitor areas of concern and complaint and resolving those in a timely manner.

Another key aspect of that tone is of embracing that axiom “never put off what you can do today.” This attitude appropriately emphasizes that some areas of financial reporting really can move forward with good, thoughtful use of technology and a virtual presence. Clearly communication is important to bringing that to light. Other times, things can be delayed. Finding the right balance, between things that move forward and things that are delayed and still meeting the needs of the marketplace for periodic financial reporting is a topic that CFOs and audit committees will certainly want to thoughtfully consider:  this becomes especially important in the instance where a company may need to seek to  apply the SEC’s permitted deferral of timelines for periodic disclosures.

FEI Daily: A lot of companies are having a difficult time with forecasting and making estimates right now. What advice do you have for them?

Bricker: That general feedback that I have provided regarding estimates comes down to a few things.

First, stay focused on the accounting framework to which the estimates relates. For example, if the estimate pertains to the earnings capacity of the part of a company that is supporting the recoverability of goodwill. Often times, this is often a longer-term series of cash flows. So, staying focused on the time horizon in relation to the accounting framework is important.

Second, the credibility of the estimation process in relation to management’s views. For example, if management has a view of the earnings guidance of the business on one hand but has different view of the cash flow or earnings estimates for its impairments processes, they should pause on that and consider why those are different.

Third, the requirements of the accounting standards in areas where management might not have current expertise. They might not have had to apply particular aspects of the standards recently. Right now, those standards are much more meaningful in the preparation of the financial statements. The importance of staying current on the accounting requirements and drawing on relevant expertise, so management can be confident in the appropriateness of the judgment, the completeness of thinking and the appropriateness of conclusions is tremendously important.

Credibility of forecasts, consistency with the view of the business and having the right knowledge represents a good framework for thinking about how management would like to communicate with its audit committee on those same judgments.

FEI Daily: Critical audit matters (CAMs) is a fairly new standard. How has COVID-19 had an impact on CAMs thus far? How might COVID-19 impact CAMs moving forward? 

Bricker: CAMs are defined as areas within the audit that are especially complex, challenging or judgmental. There are aspects of the audit process, which will meet those criteria. As I think about meeting those criteria, I’m focused on the audit process regarding elements of the financial statements or disclosures. Meaning, I would anticipate that the CAM is more descriptive than just COVID-19; it’s the affect that the uncertainty has on the audit process. (e.g., areas of significant judgment in the evaluation of management’s impairment decisions, areas of significant judgment in the area of going concern, or the realization of deferred tax assets)