Support Learning and Insight

It’s more important than ever to understand the challenges facing financial executives. Support the Financial Education & Research Foundation today.

Accounting

The Many Benefits of Accounting Advisers to Corporate Finance: Through COVID-19 and Beyond


by Steve Barta

Here are several ways an effective accounting adviser can help senior finance leaders amidst the pandemic and thereafter.

© undefined undefined/iStock/Getty Images Plus

COVID-19 has caused an unprecedented health and economic crisis, and no industry is immune. While many company executives are consumed with understanding and responding to the effects of the pandemic on their global operations and business continuity plans, finance departments are exhaustively working to understand the accounting and financial reporting implications. Coupled with an already daunting task of implementing a host of new and complex accounting standards over the last few years, including standards that impact the way revenue is recognized and the way leases and credit losses are accounted for, the spotlight on finance departments has never been hotter. How corporate finance teams respond in the face of all these challenges, old and new, could have a significant impact on how a company emerges from COVID-19, and how the company performs and grows in a post-COVID-19 global business economy.

All organizations, regardless of whether they have direct exposure to or a presence in areas affected by COVID-19, will need to consider accounting and reporting implications given the pervasive impact the virus is having around the world and across industries. The current and highly fluid market environment is making it even harder for finance teams to estimate future earnings and cash flows, prompting them to take a closer look at valuations and assess their assets for potential impairments. At the same time, they are evaluating the impacts of myriad governmental and regulatory relief solutions that may be available to their companies. On top of all that, availing themselves of available relief often causes its own challenges for a finance function. For example, the SEC recently announced that it is providing conditional extensions of filing deadlines for public companies whose financial reporting may be impacted by coronavirus – yet, navigating how and under what conditions a company can qualify for this option can also be a complex exercise.

Documenting complex transactions and their related accounting conclusions can be extremely challenging for finance departments even before COVID-19 given today’s complex standards for internal controls over financial reporting. Adding to the challenge is an expectation of finance departments to “do more” – specifically, to create value across the entire business. Independent external auditors can certainly provide help identifying applicable guidance and discussing the application of such guidance. External auditors, however, are limited by independence regulations. Factoring in COVID-19makes the magnitude of the challenges that much greater.

Rather than go it alone, corporate finance leaders may consider tapping into accounting advisers and other third-party professionals who can advise on the more technical accounting and financial reporting issues at play. Here are several ways an effective accounting adviser can help senior finance leaders amidst the pandemic and thereafter:

  1. Bring an experienced perspective: Beyond existing complex scenarios, i.e. determining whether you’re a principal or an agent for third-party products that you resell to a customer, or assessing whether your employee share-based payment awards should be liability- or equity-classified, COVID-19 is creating complex, fluid and, in some cases, unprecedented scenarios that could make it difficult for preparers to identify the appropriate accounting. Many companies want to know how to treat loan modifications secured during the pandemic, account for price concessions in revenue contracts and account for changes in tax law resulting from the CARES Act. Accounting advisers can draw upon deep and diverse experience across industries, for both public and private organizations, to advise you as you reach an informed accounting conclusion. Moreover, they can apply lessons from similar past experiences and help leverage available regulatory relief to advise you with possible accounting approaches, help you evaluate the accounting impacts of potential arrangements, and discuss alternative accounting models to help structure transactions appropriately.
  2. Game plan future scenarios and address thorny issues earlier: There are still many unknowns about COVID-19, meaning that some accounting conclusions based on today’s available facts could shift in a matter of days or weeks as we learn more about the virus and its impact on businesses. By seeking advice from an adviser, financial executives may develop multi-pronged accounting approaches for a range of different business outcomes, giving them comfort that a plan is in place no matter which direction COVID-19 takes. This approach may also help identify and resolve any potential issues early, reducing last-minute fire drills with independent auditors.
  3. Examine alternatives to avoid unintended accounting consequences: The urgency of COVID-19 and the velocity at which it is impacting companies’ balance sheets is prompting many businesses to react without the luxury of the time necessary to fully consider all available alternatives. Companies short on time and resources are more likely to take the path of least resistance when reaching accounting conclusions, even if they suspect an alternative path may be preferable. For example, an entity may enter a transaction which would result in one accounting treatment under existing GAAP, but a different and more favorable treatment may be available if the entity early-adopted a new accounting standard. In the absence of internal resources or bandwidth to conduct thorough due diligence themselves, organizations can tap accounting advisers to advise them regarding a desired accounting treatment and ultimately protect the business from unintended accounting consequences.
  4. Explain the impacts of accounting guidance on major business decisions: Finance and non-finance leaders alike want to understand the accounting impacts of the strategic decisions their companies make while dealing with the COVID-19 crisis. The need to articulate, in plain English, the accounting and reporting consequences of a particular decision or transaction, has never been greater.  By advising on correlations between major business decisions and accounting and financial reporting standards and eliminating excessive accounting jargon, advisers can arm business leaders for smarter conversations with key stakeholders, including investors, audit committees and independent auditors.
  5. Manage internal controls related to COVID-19: As businesses adapt to the unique operating environment COVID-19 demands, internal controls will also need to keep pace. For example, a control activity may need to be revised or created to take into consideration the fact that it may now be performed remotely or that the personnel who would normally perform it may not be available. Accounting advisers can help finance professionals assess whether an entity’s internal controls are well-designed, properly implemented, and operating effectively. They can determine whether existing internal controls can be tweaked or if new ones are required and can also advise on how to design and implement them to assist in their operating effectiveness.

As businesses continue to manage lost revenue, disrupted supply chains and volatility in financial markets as a result of COVID-19, preparing financial statements and planning for the future may remain extremely challenging. Without the right accounting tools and knowledge, companies could miss opportunities to streamline accounting processes and get their financial houses in a stronger place to weather the storm. All of this makes it critical that accounting and financial reporting are handled in a way that sets the business up to recover and thrive.

Steve Barta is an Audit & Assurance partner at Deloitte & Touche LLP.