Audit committees have a lot of work on their hands in overseeing financial reporting during what the Covid-19 pandemic means is a highly irregular quarter, according to Paula Loop, leader of PwC’s Governance Insights Center.
The crisis is causing unprecedented disruption and uncertainty around both companies’ business health and how they are operating, with millions of employees working from home – not to mention millions more who have lost jobs or have been furloughed.
The SEC, in an effort to address potential compliance problems arising due to the pandemic, has given public companies a 45-day extension to file disclosure reports that would otherwise have been due between March 1 and July 1, provided they can explain why the delay is needed. This relief is welcome, but companies – and audit committees – still face significant challenges in meeting their obligations and getting comfortable with their disclosures, Loop tells Corporate Secretary.
Right now, audit committees should be spending a lot of time talking to their financial reporting teams – as well as internal and external auditors and other important third-party service providers – to make sure people have worked out how reporting will get done this quarter because it will be difficult to do so as normal, she advises.
In doing so, Loop explains, audit committees need to get answers to a series of questions about the adapted process, including:
- How are people able to work remotely and are they able to gain access to necessary information from around the world?
- Who is taking part in the process this quarter, given that members of the financial reporting team may not be available due to being sick or having childcare or connectivity issues?
- Can the committee be comfortable with the people who remain or have been brought in to help this quarter?
- What different arrangements have been worked out with customers and suppliers?
- What new financial issues have arisen; for example, regarding leases, debt coverage, liquidity or even going concern matters?
The aim is to make sure the audit committee is comfortable with the process and that the right people with the right skills are involved while also making sure the company is being as transparent as possible, Loop says. She notes that companies want to behave as normally as possible, but that audit committees may have to decide to delay reporting to ensure it is done correctly. ‘If it means a few extra days, then it means a few extra days,’ she comments.
Another challenge in getting reporting done on its usual schedule is that accounting and disclosures may need to involve issues about which there is uncertainty, such as the length of the lockdown and regional impacts of the pandemic.
Among other things, audit committees should get updates on any ethics or compliance issues that may arise or are being reported on the company hotline, and should maintain their oversight of internal audit, Loop says.
The corporate secretary and/or general counsel has an important role to play in making sure the committee is considering all these issues and in setting the committee’s agenda to ensure the right topics are being covered, according to Loop. She says they should also be thinking about timelines in the reporting process, and perhaps adding an extra audit committee meeting to the schedule or changing the timing of an existing meeting. One tactic some are using is holding a preliminary meeting, perhaps just involving the corporate secretary and audit committee chair, to make sure the committee as a whole is aware of all the issues it needs to address, Loop adds.
If the audit committee holds its meetings virtually, the company also needs to make sure it is confident that the security of the technology – as is the case with board portals – will prevent sensitive information being leaked, she says.