The Security and Exchange Commission’s chief accountant, Sagar Teotia, recently issued a statement in which he reminded audit committees of the critical need for their oversight in these times of rapid change and increased uncertainty.
In a June 25 webinar, RSM addressed the question of how the board’s role in financial reporting oversight changes, given the ramifications of COVID-19. The webinar stressed that the role of the audit committee in overseeing and monitoring the financial reporting process does not necessarily change, but the areas of responsibilities, and their breadth and depth, may change significantly.
As always, the audit committee’s review of the financial statements begins with an understanding of the clarity of the reporting, the quality of the accounting policies and the adequacy of disclosures, particularly those related to judgmental and complex accounting areas. Given COVID-19, the need to understand expands to include management’s considerations of the impact of the pandemic on myriad issues, including the valuation of accounts and changes in significant assumptions used in developing estimates. Care needs to be taken that disclosures are made timely and that they clearly describe risks and how the company is responding to them.
The COVID-19 pandemic continues to affect businesses’ operations and therefore their internal control over financial reporting. With employees absent from work or working remotely, it is more important than ever to monitor who is performing key control operations. Are there changes in how controls are being performed and are they being done in a timely fashion? And equally important, are the required SEC disclosures for changes that materially affect, or are reasonably likely to materially affect, an entity’s internal control being made?
The pandemic presents an opportunity for audit committees to ask even more pointed questions of their auditors regarding whether management has adequately evaluated significant economic and operational impacts on accounting estimates and disclosures. Audit committees also should consider asking questions regarding potential changes to the audit process that may result from COVID 19-related restrictions.
Given the added responsibilities that COVID-19 brings to financial statement preparers, audit committees and auditors, boards should ensure that all key players in the financial reporting chain have the requisite time and information to perform their financial reporting oversight responsibilities.